Economics Interview Question:

What are the advantages of leaving resource allocation to price allocation?

Submitted by: Administrator

The 5 advantages are Neutral, Flexible, Freedom of choice, No administrative cost and lastly Diminished incentives. Distinguish between diminishing returns and diseconomies of scale. Diseconomies of scale I guess means as you produce more it becomes more expensive to produce.

For example, you produce output 1 for $2 but output 2 for $5 thus the second one required $3

Now let us say input for output 1 had to be doubled for input 2. One land gave output 1. Output 2 needed 2 lands. Then there are not diminishing returns.

However, as second land was costing $3 there was diseconomies of scale.
Submitted by: Administrator