Economists worry quite a bit about efficiency in market types.

a. How does an economist define allocative efficiency? What types of markets exhibit allocative efficiency?

b. How does an economist define economic or productive efficiency? What types of markets exhibit productive efficiency?

c. Provide a graph of a monopolistically competitive firm and identify the excess capacity on the graph.

Assume that the following conditions exist for a perfectly competitive firm:

price = $8.50, current output = 100 units, ATC at current output = $9.00, AVC at current output = $8.00, total fixed costs =$100 and MC at current output = $8.00.

a. Is the firm earning any economic profit currently? How much is its profit or loss?

b. Is the firm maximizing its economic profit? What should the firm do to maximize profit or minimize loss?

c. Given your answers in part b, how will the market adjust to reach long-run equilibrium? Include appropriate graphs in your explanation.

Assume that Raul Lopez is a soybean farmer in the Florida panhandle and that he operates under conditions of perfect competition. The graphs above represent the soybean market and Raul's farm:

a. At what price will Raul sell his soybeans? What quantity will he plant? Why?

b. If Raul discovers a new irrigation technique that reduces his AVC and ATC, how will the price at which he sells his product change? Why? What will happen to his output?

c. How will the market change if Raul shares his discovery with all soybean farmers? How will price and quantity sold in the soybean market change?

d. Explain and graphically illustrate how the market will adjust after the events in part c.