When the Marginal Rates of Substitution for Two Consumers Differ

question 29

Multiple Choice

When the marginal rates of substitution for two consumers differ:

• A)the indifference curves of the consumers are tangent.
• B)mutually beneficial trade cannot take place.
• C)consumers' bargaining skills will determine their position on the contract curve.
• D)trade will benefit one of the consumers and harm the other consumer.

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Definitions:

Excess Burden

The cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium, often due to taxes or monopolies.

Social Cost

The total cost to society as a result of an action or activity, including both private costs incurred by individuals and external costs affecting others.

Monopoly Profit-maximizing

The process by which a monopoly sets its output and price levels to achieve the highest possible profit, given its unique position as the sole seller of a product or service.

Government Failure

Situations where government intervention in the economy creates inefficiency, leading to a misallocation of resources or failure to achieve intended outcomes.