Question

Which of the following statements is correct regarding production and equiLiBrium?

1) At equiLiBrium, production is the most efficient, and there is no deadweight loss.
2) If production is greater than the level at equiLiBrium, the marginal cost will exceed the marginal benefit, and there will be deadweight loss.
3) If production is less than the equiLiBrium level, the marginal benefit will be higher than the marginal cost, and the total or social surplus will be less than at equiLiBrium.
4) All of the above

Answer 1

The statement 'All of the above' is correct; at equilibrium, there's no deadweight loss, and production is most efficient. Production above or below equilibrium results in inefficiency, with either a surplus or shortage, leading to deadweight loss or reduced total surplus, respectively.

Step-by-step explanation:

The correct statement regarding production and equilibrium is: all of the above. Specifically, at equilibrium, production is most efficient, and there is no deadweight loss. If production exceeds equilibrium levels, the marginal cost will be higher than the marginal benefit, leading to deadweight loss. Conversely, if production is less than the equilibrium level, the marginal benefit is higher than the marginal cost, resulting in less total or social surplus compared to the surplus at equilibrium.

Allocative efficiency occurs when the quantity of output is where the price (P) equals the marginal cost (MC). This balance ensures that the marginal benefit to society (measured by price) is equal to the marginal cost of production. If a monopoly exists, the price will exceed the marginal cost at the profit-maximizing output level, causing a lower quantity to be sold at a higher price than in a perfectly competitive market, thus leading to a loss of consumer welfare.