In a competitive market with no externalities,
A) at the equilibrium price, marginal benefit exceeds marginal cost.
B) buyers cannot control the price, so the consumer surplus is zero.
C) the consumer surplus is equal to zero because of competition.
D) at the equilibrium price, marginal benefit equals marginal cost.
E) at the equilibrium price, the total amount of consumer surplus equals the total amount of producer surplus.

Question

Quizplus · Accepted Answer

In a competitive market with no externalities, the market equilibrium occurs where the marginal benefit (MB) equals the marginal cost (MC), which means that the market is efficiently allocating resources. At this equilibrium point, the price reflects the value that consumers place on the product and the cost of producing it. Therefore, at the equilibrium price, MB equals MC, and option D is correct. The consumer surplus is not necessarily zero in a competitive market, but it is lower compared to a market with a monopoly or oligopoly, where the producer has more market power to set higher prices. Option A is incorrect because while MB exceeds MC at lower prices, it will decrease as more units of the good are consumed leading to the equilibrium point where they are equal. Options B and C are incorrect because consumers have the power to control the market competing with each other to find the lowest price leading to the equilibrium point that maximizes the total surplus, which is the sum of consumer and producer surplus. option E is incorrect because the total amount of consumer surplus could be more significant than the total amount of producer surplus or vice versa, depending on the specific market conditions.

In a Competitive Market with No Externalities