Question

For allocative efficiency to hold, which of the following must be true?

1) Price must equal marginal revenue of the last unit sold.
2) Price must equal the marginal cost of the last unit produced.
3) Average variable cost is minimized in production.
4) Average total cost is minimized in production.

Answer 1

To achieve allocative efficiency, price must equal the marginal cost of the last unit produced.

Step-by-step explanation:

For allocative efficiency to hold, price must equal the marginal cost of the last unit produced. Allocative efficiency occurs when resources are allocated in a way that maximizes total societal welfare. In a perfectly competitive market, price is determined by the intersection of supply and demand curves. The intersection of the price and marginal cost curves ensures that the value to consumers of the last unit produced equals the cost society incurs to produce it, which signifies allocative efficiency.