Thursday, December 13, 2007

Valley of the Locusts


In part c of the Valley of the Locusts question, if the total marginal value 160> total cost 100, it is a good thing, right? Why NO?


The answer to this question is no because the market solution, i.e. the answers to parts a and b state that the consumption where marginal benefit equals 160 and marginal cost is 100 won't happen. In other words, the answers to parts a and b are not welfare maximizing.

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