The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16-2
-Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there are no externalities in production.In this case, ________ for allocative efficiency.
A)P1 and Q1 are appropriate
B)the price P1 is appropriate but the quantity Q1 is too low
C)the price P1 is appropriate but the quantity Q1 is too high
D)the price P1 is too low but the quantity Q1 is appropriate
E)the price P1 is too high but the quantity Q1 is appropriate

Question

The diagram below shows demand and supply curves for some perfectly competitive market.
  FIGURE 16-2
-Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there are no externalities in production.In this case, ________ for allocative efficiency.
A)P1 and Q1 are appropriate 
B)the price P1 is appropriate but the quantity Q1 is too low 
C)the price P1 is appropriate but the quantity Q1 is too high 
D)the price P1 is too low but the quantity Q1 is appropriate 
E)the price P1 is too high but the quantity Q1 is appropriate

Quizplus · Accepted Answer

Allocative efficiency occurs where marginal benefit equals marginal cost, which in a perfectly competitive market occurs at the intersection of the demand and supply curves. In this case, MB includes all social benefits, so the demand curve incorporates all the private and social benefits. Therefore, the intersection of the MB curve and supply curve represents the socially optimal quantity and price, which is at point P1 and Q1. Hence, the choice is A.

The Diagram Below Shows Demand and Supply Curves for Some