Author Question: What assumptions lead to the conclusion that that the allocation of resources among firms is ... (Read 46 times)

Redwolflake15 · **on:** Jun 29, 2018

What assumptions lead to the conclusion that that the allocation of resources among firms is efficient.

What will be an ideal response?

Question 2

You are thinking about buying a house. You find one you like that costs 200,000 . You learn that your bank will give you a mortgage for 160,000 and that you would have to use all of your savings to make the down payment of 40,000 .

You calculate that the mortgage payments, property taxes, insurance, maintenance, and utilities would total 950 per month. Is 950 the cost of owning the house? What important factor(s) have you left out of your calculation of the cost of ownership?

ju · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The assumptions that factor markets are competitive and open, that all firms pay the same prices for inputs, and that all firms maximize profits lead to the conclusion that the allocation of resources among firms is efficient.

Answer to Question 2

You have ignored the opportunity cost of the funds you are using for the down payment. By using your 40,000 to buy the house, you give up the opportunity to earn interest on that money. If you could earn 5 interest, then the opportunity cost is 0.05 x 40,000 = 2,000 per year, or 167 per month. This does not imply that you should not buy this house. It does imply, however, that you need to think carefully about opportunity cost as you weigh this decision.An economist would tell you that the monthly cost of owning this home is 950 + 167 = 1,017 .