Question

Question 26 (1 point) Under which of the following scenarios will deadweight loss occur? A) The actual quantity prevailing in the market is the equilibrium quantity. B) The actual price prevailing in the market is the equilibrium price. OC) The market clears. D) The actual price prevailing in the market is lower than the equilibrium price. Question 27 (1 point) Once diminishing returns to labor occurs, it causes which of the following phenomena? A) Decreasing returns to scale. B) Increasing returns to scale. C) The marginal productivity of labor declines as output increases. D) Constant returns to scale. MacBook Air II F10 DOO F7 20 000 F4 FS F3 - * A $ # % & 7 o 8 9 6

Answer 1

1) Answer: When the actual price prevailing in the market is lower than the equilibrium price.

A dead weight loss is a loss towards to society / market due to market errors and inefficiency. It is generated when the market does not operate at equilibrium price and quantity. Let us see a diagram for the same;

Y S DEADWEIGHT LOSS E Р P1 D QS Q 7+ х

As we see in the above diagram, there is deadweight loss in this market as the market operated below it's equilibrium price.

2) Answer: Decreasing returns to scale

As labor is a variable input, increasing labor beyond a certain quantity results in decrease in returns to scale as there is diminishing returns due to the increase in variable input beyond a level in the scale of production.

This phenomenon is due to the Law of Diminishing Returns, which state that, employment of variable input beyond a point will lead to diminishing returns to scale in the level of production as marginal output / contribution per unit of labor will decline with the increase in the number of labor units employed, keeping all other factors of production constant.