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1st Year Economic resources
Original Center
Dr: Zayan Ahmed
Sheet 2
Contact Us: 01152745507
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Chapter 1 part 2
The marginal COST (MC)
• is the opportunity cost of one more unit of it.
• As we move along the PPF, the opportunity cost of a pizza increases.
Marginal Benefit MB
• the amount consumer willing to pay for an additional unit of that good
• principle of decreasing marginal benefit,"The more we have of any good, the smaller is its
marginal benefit and the less we are willing to pay for an additional unit of it".
Allocative efficiency
• means that we are producing at the point on the PPF that we prefer above all other
points.
• Therefore, the condition for allocative efficiency is that marginal benefit equals marginal
cost; or MB = MC.
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▪ If the economy is producing exactly 2.5 million pizzas, marginal cost equals marginal
benefit, and the efficient quantities of both pizza and cola are being produced.
▪ In this situation, we say that allocative efficiency is achieved.
▪ This occurs at the point of intersection between MB and MC curves
• If the economy produces more than 2.5 million pizzas, e.g. 3.5 millions, too many pizzas are
being produced. This leads marginal cost to exceed marginal benefit of a pizza (MB < MC)
and creates an incentive to reduce the production of pizza in favor of the production of
cola
• If the economy produces less than 2.5 million pizzas, e.g. 1.5 millions, too few pizzas are
being produced. This leads marginal benefit to exceed marginal cost of a pizza (MB > MC)
and creates an incentive to increase pizza production at the expense of reducing the
production of cola.
true or false
1. Marginal Cost (MC) is upward sloping because of increasing opportunity cost.
2. Marginal Benefit (MB) is downward sloping because the more we consume, the less we are
willing to pay for an extra unit.
3. Allocative efficiency occurs when MB > MC.
4. If MB > MC, the economy is producing less than the efficient quantity, so production
should increase.
5. If MC > MB, the economy is producing more than the efficient quantity, so production
should decrease.
6. If quantity increases, willingness to pay also increases.
7. Marginal Cost (MC) represents the opportunity cost of producing one more unit.
8. Marginal Benefit (MB) is the maximum amount consumers are willing to pay for an
additional unit.
9. The principle of diminishing marginal benefit means that the more we consume, the higher
the marginal benefit.
10. Allocative efficiency occurs when MB = MC.
11. At the point of allocative efficiency, both pizza and cola are produced in efficient
quantities.
12. Producing 3.5 million pizzas when efficiency is at 2.5 million means MB > MC.
13. Producing 1.5 million pizzas when efficiency is at 2.5 million means MB < MC.
14. As quantity increases, willingness to pay decreases.
15. The MB curve is upward sloping.
16. The MC curve is upward sloping due to increasing opportunity cost.
17. Allocative efficiency means society achieves its most preferred combination of goods.
18. If MB < MC, there is an incentive to reduce production.
19. If MB > MC, there is an incentive to increase production.
20. The intersection of MB and MC curves represents allocative efficiency.
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🔘 (MCQs)
1. Allocative efficiency is achieved when:
a) MB > MC b) MB < MC c) MB = MC d) None of the above
2. If the economy produces more than the efficient quantity of pizzas:
a) MB > MC b) MB < MC c) MB = MC d) None of the above
1. Marginal Cost curve is generally:
a) Downward sloping b) Upward sloping c) Horizontal d) None of the above
2. Marginal Benefit curve is generally:
a) Upward sloping b) Downward sloping c) Vertical d) None of the above
3. Allocative efficiency is achieved when:
a) MB > MC b) MB < MC c) MB = MC d) None of the above
4. If MB > MC, what should happen?
a) Reduce production b) Increase production c) Keep production constant d) Stop production
5. If MC > MB, what should happen?
a) Reduce production b) Increase production c) Keep production constant d) Stop production
6. At 2.5 million pizzas, MB = MC. This means:
a) Too few pizzas are produced
b) Too many pizzas are produced
c) Efficient quantity is produced
d) None of the above
7. Producing more than the efficient quantity leads to:
a) MB > MC b) MB < MC c) MB = MC d) None of the above
8. Producing less than the efficient quantity leads to:
a) MB > MC b) MB < MC c) MB = MC d) None of the above
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🔘 Multiple Choice
1. As quantity increases, willingness to pay:
a) Increases b) Decreases c) Stays constant d) None
2. Allocative efficiency means:
a) MB > MC b) MB < MC c) MB = MC d) None
3. If MB < MC, there is an incentive to:
a) Increase production b) Decrease production c) Stop production d) None
4. If MB > MC, there is an incentive to:
a) Increase production b) Decrease production c) Stop production d) None Answer: a
5. The MB curve reflects:
a) Law of diminishing marginal benefit
b) Law of increasing marginal benefit
c) Law of constant marginal benefit
d) None
6. The MC curve reflects:
a) Law of increasing opportunity cost
b) Law of decreasing opportunity cost
c) Law of constant opportunity cost
d) None
7. Allocative efficiency occurs at:
a) MB > MC b) MC > MB c) Intersection of MB and MC curves d) None