Answer to Question #143630 in Microeconomics for Aastha

Question

b)Define a competitive market equilibrium.
i. Are consumers maximizing their utility? If so, what do we expect about the relationship between consumer’s subjective valuations and market prices?
Yes, consumers are maximizing their utility.

ii. Are firms minimizing their costs of production? If so, what do we expect about the relation-ship between firms’ internal input valuations and market prices?

Answer 1

a competitive market equilibrium is a method whereby profit maximizing producers and utility maximizing consumers in competitive markets with freely determined prices arrive at an equilibrium price.

i. Are consumers maximizing their utility? If so, what do we expect about the relationship between consumer’s subjective valuations and market prices?

Yes, consumers are maximizing their utility.

ii. Are firms minimizing their costs of production? If so, what do we expect about the relation-ship between firms’ internal input valuations and market prices? yes because in a free market economy firms use cost curves to find the optimal point of production.

the relation between them is in the inputs that we use in the valuation exist and both demand and cost emerge at this point.