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Author Question: Comment on the following statement: When there are no externalities present, the level of output for ... (Read 41 times)

Capo

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on: Jun 29, 2018
Comment on the following statement: When there are no externalities present, the level of output for a private good produced by a perfectly competitive firm is efficient.
 
  What will be an ideal response?

Question 2

Why might two Fortune 500 companies borrow the same amount of money for the same term at the same time yet both pay a very different interest rate even when the same banks makes both loans?
 
  What will be an ideal response?


parker125

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Reply #1 on: Jun 29, 2018
Answer to Question 1

The statement is true. Perfectly competitive firms produce where price is equal to marginal cost. If no externalities are present, the price of the product measures the full benefits to society of an additional unit of output, and the marginal cost measures the full costs to society of an additional unit of output. Thus, output is produced up to the point where the additional value from producing another unit the good is equal to the additional cost of producing another unit of the good.

Answer to Question 2

The reasons that interest rates are different have to do with many other factors than the ones mentioned. Most notably the credit-worthiness of the firm will play a role and the expected ability of the firm to be able to satisfactorily pay back the loan.


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