Figure 5-3 Figure 5-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18.
-Refer to Figure 5-3.At the equilibrium price of $15,consumers are willing to buy 80 kilograms of tiger shrimp.Is this an economically efficient quantity?

Question

Figure 5-3  Figure 5-3 shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18.
-Refer to Figure 5-3.At the equilibrium price of $15,consumers are willing to buy 80 kilograms of tiger shrimp.Is this an economically efficient quantity?

Quizplus · Accepted Answer

At the equilibrium price of $15, the market is in a state of economic efficiency because the price is equal to the marginal benefit that consumers are willing to pay for the last unit of tiger shrimp, which is also equal to the marginal cost of producing that unit. Therefore, any change in price or quantity will result in a loss of economic efficiency. In this case, if producers cut output to 40 to raise the price to $18, it will result in a decrease in the quantity demanded to 60, which means that consumers are willing to buy less than before at a higher price. This suggests that the marginal benefit of the last unit of tiger shrimp sold at $18 will be less than $15, which means that the market will be in a state of economic inefficiency.

Figure 5-3 Figure 5-3 Shows the Market for Tiger