Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers’ full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or kept the same in order to achieve allocative and productive efficiency. a. maximum willingness to pay exceeds minimum acceptable price. b. mc > mb. c. total surplus is at a maximum. d. the current quantity produced exceeds the market equilibrium quantity.

The answers are as follows:

A. Output should be Increased

B. Output should be Decreased

C. Output should be kept the same

D. Output should be Decreased

Explanation:

For A.

When the maximum willingness to pay exceeds minimum acceptable price, the Output should be increased because customers are willing to pay more for the product, therefore more revenue will be accrued, and this will lead to more profit.

For B.

When mc > mb, that is, when marginal cost is greater than marginal benefits, output should be decreased. This is because profit is maximized when Marginal costs equal Marginal benefits, therefore when Marginal costs exceed Marginal Benefits, a loss is incurred and output should be decreased.

For C.

When total surplus is at a maximum, output should be kept the same, this is because adding extra outputs at this maximum stage will lead to diminishing returns on capital.

For D.

When the current quantity produced exceeds the market equilibrium quantity, output should be reduced in order to avoid flooding the market with excess products which will then lead to a decrease in price.

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