Homework Clinic
Social Science Clinic => Economics => Topic started by: nevelica on Jun 30, 2018
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The two deadweight triangles are the Consumption distortion and Production distortion losses. It is easy to understand why the Consumption distortion constitutes a loss for society.
After all it raises the prices of goods to consumers, and even causes some consumers to drop out of the market altogether. It seems paradoxical that the Production distortion is considered an equivalent burden on society. After all, in this case, profits increase, and additional production (with its associated employment) comes on line. This would seem to be an offset rather than an addition to the burden or loss borne by society. Explain why the Production distortion is indeed a loss to society, and what is wrong with the logic that leads to the apparent paradox.
Question 2
Which of the currencies below does not serve a role as an international reserve currency?
A) European euro
B) Japanese yen
C) U.S. dollar
D) Mexican peso
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Answer to Question 1
The Production Distortion represents an inefficient shift of society's resources to produce a good, which it could not sell profitably at world prices. Since (with full employment assumed) these resources were formerly used to produce export goods, which could compete profitably, the net result is a loss in real income to the country.
Answer to Question 2
D