Question

1-Explain why the marginal cost of production must increased if the marginal product of the marginal resource is decreasing.

2- Define productivity efficiency and allocative efficiency. What conditions must be met in order to achieve them?

Answer 1

1. A lower marginal cost of production means that the business is operating with lower fixed costs at a particular production volume. If the marginal cost of production is high, then the cost of increasing production volume is also high and increasing production may not be in the business's best interests.

2. Definition of productive efficiency

This is defined as producing goods and services for the lowest cost. Productive efficiency is said to occur on the production possibility frontier. On the PPF curve, it is impossible to produce more of one good without producing less of another.

Allocative efficiency

Allocative efficiency is concerned with the optimal distribution of goods and services.

Allocative efficiency is quite different and is more concerned with the distribution and allocation of resources in society.

Allocative efficiency looks at the marginal benefit of consumption compared to the marginal cost. Allocative efficiency will occur at an output when marginal benefit (price) = marginal cost.

• Allocative efficiency occurs where price = marginal cost (MC)