Question

QUESTION 1 Adam Smith's invisible hand economy takes individual decisions based on self-interest and guides them to outcomes that are efficient but don't necessarily benefit the social good efficient and benefit the social good second best without additional coordination can be efficient or inefficient, depending on the situation QUESTION 2 A market free from imperfections will allocate resources to the most efficient firms because consumers have full information about the range of products many firms compete with each other to provide a good quality good and the lowest price firms who fail to deliver a good quality good at a low price will go out of business, leaving production for the most efficient firms all of the above QUESTION 3 Which of the following market conditions is NOT required for market efficiency Decision makers have full information and are rational There is sufficient competition between firms there are no externalities Income is fairly evenly distributed

Help Please

Answer 1

1. Invisible hand economy tells without government intervention and all economy reaches it's equilibrium , where demand equals supply.According to the theory efficient allocation can be brought into the society.Invisible hand economy is true from the prospective of Perfect competition.In perfect competition firms produces identical products with same factors of production.But when negative externalities (pollution..etc), Monopoly (market imperfections) ..etc there can't be an efficient production.Also social good are like air , healthcare ..etc.These products contains externalities , free riders(enjoying services without paying..etc) , value issues ..etc.So efficiency can't be achieved.So won't benefit social goods .Also efficiency is not maximised in second best thing.So it can be efficient or cannot be depending on situation in real world.That is why government intervention is needed.Eventhough according to invisible hand economy theory it is efficient .But in reality not.

The most suitable Answer is ,(d) can be efficient or inefficient, depending on the situation.

2.Market free from imperfections is Perfect competition.So look for things suitable and unsuitable for perfect competition from the options.In perfect competition consumer have perfect information about the products.There will be many firms and compete to produce products at low cost and price .Thus reaches an equilibrium price is fixed and demand equals supply.Also inefficient firm can't produce at low cost and price.Thus they will face losses and leave industry.

The most suitable Answer is ,(d) All of the above.

3.Market efficiency can be easily achieved in perfect competition .Not in imperfect competition.So analyse in that prospective.

Decision makers have full information and rational in perfect competition.Then only they will try to minimise cost and produce optimum output and earn profit.There need sufficient competition in market.Otherwise assume a monopolist,He will not utilize resources efficiently, also earns super normal profits.There also need no externalities.Assume pollution, it will reduce productivity as diseases and also wealth of workers.So the Answer will be ,Income is fairly evenly distributed.This is a thing,which determines  shape and position of a demand curve.Efficiency is only where demand and supply meets.