Answer to Question #245771 in Microeconomics for Tay

Question

Critically evaluate and explain the following statement.
An excess of price over marginal cost is the market’s way of signaling the need for more production of a good.

Answer 1

This statement is true. The marginal cost of a good is the value of alternative goods that society gives up to produce the last unit of that good. When consumers are paying a price higher than the marginal cost required to produce a good, this signals that society values this good more than alternative goods, and resources should be reallocated to this industry.