The MU of computers is initially larger than the MC of producing them in a free market.We may expect output of computers to
A)fall, MC to rise, and MU to rise.
B)rise, MC to fall, and MU to fall.
C)rise, MC to rise, and MU to fall.
D)fall, MC to fall, and MU to rise.

Question

Quizplus · Accepted Answer

Initially, the marginal utility (MU) of computers is high because they are in high demand and people are willing to pay a high price for them. However, the marginal cost (MC) of producing computers is also high because resources are being stretched to produce as many as possible. In a free market, prices will adjust to balance supply and demand. As more firms enter the market to produce computers, the MC will begin to fall due to increased competition and economies of scale. However, as the market becomes saturated with computers, the MU will begin to fall because people have already bought what they need or want. Therefore, we can expect the output of computers to rise due to increased competition and economies of scale, the MC to rise initially as resources become more scarce, and the MU to fall as the market becomes saturated.

The MU of Computers Is Initially Larger Than the MC