Question

What is meant by allocative efficiency? Allocative efficiency is when every good or service A. is produced up to the point where price equals marginal cost B. Is produced at lowest possible cost C. produced generates an equal amount of consumer surplus and producer surplus D. is produced up to the point where price equals marginal revenue E. is produced up to the point where the difference between the marginal benefit for consumers and the marginal cost of producing it is maximized

Answer 1

Allocative efficiency is represented by option A: "is produced up to the point where price equals marginal cost.

Step-by-step explanation:

Allocative efficiency means that among the points on the production possibility frontier, the chosen point is socially preferred at least in a particular and specific sense. In a perfectly competitive market, the price will be equal to the marginal cost of production. Thus, this occurs when resources are allocated in a way that the production level of a good or service aligns with the point where its price in the market equals the marginal cost of producing it.

For example, when perfectly competitive firms follow the rule that profits are maximized by producing at the quantity where price is equal to marginal cost, they are ensuring that the social benefits they receive from producing a good are in line with the social costs of production.