Author Question: What determines how much market power a firm has? What will be an ideal ... (Read 125 times)

c0205847 · **on:** Jun 29, 2018

What determines how much market power a firm has?

What will be an ideal response?

Question 2

Why is a consumer's satisfaction maximized when the marginal benefit from the last dollar spent on one good is equal to the marginal benefit from the last dollar spent on another good?

What will be an ideal response?

Christopher · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The extent to which a firm can exercise market power is limited by the ease with which consumers can substitute for its product.

Answer to Question 2

The marginal benefit from each additional dollar spent should be equal across various goods in order to maximize overall well-being. If these marginal units (last units) of satisfaction are not equal, then the consumer can be made better off by shifting consumption toward the good that yields more satisfaction at the margin. Hence, equilibrium occurs at the point where satisfaction from the last dollar spent is equal for all goods. This is the reasoning behind the old phrase getting the most bang for the buck.