Explain why a voluntary production quota is difficult to operate. ...

[Deast7027]

Explain why a voluntary production quota is difficult to operate.
 
  What will be an ideal response?

Question 2

Refer to Scenario 1-3. Had the firm not produced and sold the last 400 t-shirts, would its profit be higher or lower, and if so by how much?
 
  A) Its profit would be 800 higher. B) Its profit would be 4,000 lower.
  C) Its profit would be 4,800 higher. D) Its profit would be 800 lower.

[spencer.martell]

Answer to Question 1

A voluntary quota is difficult to operate because a production quota results in a massive incentive to cheat on the production quota by increasing production. A production quota decreases the quantity produced. By decreasing the quantity produced, a production quota raises the price and reduces the marginal social cost of the last unit produced. Because the price exceeds the marginal social cost, producers have an incentive to increase their production (beyond the quota amount) to boost their profit.

Answer to Question 2

A

[Deast7027]

Thank you

[spencer.martell]

No problemo