Question

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency​ mean? A. Each firm produces up to the point where all scale economies are exhausted. B. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. C. Firms use an input combination that minimizes cost and maximizes output. D. Production occurs at the lowest average total cost.

Answer 1

Allocative efficiency is achieved when firms produce up to the point where the price equals the marginal cost of the last unit, reflecting that resources are allocated in a way that aligns social costs with social benefits.

Step-by-step explanation:

Allocative efficiency in a perfectly competitive market occurs when firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. This ensures that the social benefits derived from producing a good are in line with the social costs of production. So, from the given options, the correct answer is B: Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. Allocative efficiency indicates the chosen point on the production possibility frontier is socially preferred, reflecting the idea that resources are allocated most beneficially from a societal perspective. In contrast, productive efficiency is about producing without waste, where goods are produced and sold at the lowest possible average cost.

Answer 2

Answer: B. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.

Step-by-step explanation:

Allocative efficiency means that the point chosen on the production possibility frontier is socially preferred.

In a perfectly competitive market, allocative efficency is achieved at the point where price equals the marginal cost of production. At this price producer and consumer surplus is maximised.