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Divya Relangi
on Oct 25, 2024

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Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joe's marginal utility of apples is 3, and his marginal utility of oranges is 5. Jane's marginal utility of apples is 6, and her marginal utility of oranges is 10. The current price of apples is $4 and the current price of oranges is $5. To reach a competitive equilibrium, the required price adjustment is:

A) a decrease in the apple price relative to the orange price.
B) a decrease in the orange price relative to the apple price.
C) no change in the relative prices.
D) an increase in both prices.

Competitive Equilibrium

Competitive Equilibrium is a state where supply equals demand, market resources are efficiently allocated, and no participant in the market can influence the price of goods or services.

Price Adjustment

The process by which prices of goods and services are altered to respond to changes in the market conditions.

Apples

A widely cultivated fruit that grows on apple trees, and is consumed worldwide for its sweet flavor.

  • Illustrate how market prices facilitate competitive equilibrium and optimize resource allocation.
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Biraz BastakotiOct 25, 2024
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