The diagram below shows the market demand curve and the cost curves for a single firm. FIGURE 12- 6
-Refer to Figure 12- 6. Suppose this firm is being regulated using a policy of marginal- cost pricing. In this case,
A) allocative efficiency is achieved because price equals marginal cost.
B) allocative efficiency is achieved because profits are maximized.
C) the result is allocatively inefficient because the firm is suffering losses.
D) the result is allocatively inefficient because the marginal cost curve lies below the ATC curve.
E) the result is allocatively inefficient because the firm is earning profits.

Question

The diagram below shows the market demand curve and the cost curves for a single firm.  FIGURE 12- 6
-Refer to Figure 12- 6. Suppose this firm is being regulated using a policy of marginal- cost pricing. In this case,
A) allocative efficiency is achieved because price equals marginal cost. 
B) allocative efficiency is achieved because profits are maximized. 
C) the result is allocatively inefficient because the firm is suffering losses. 
D) the result is allocatively inefficient because the marginal cost curve lies below the ATC curve. 
E) the result is allocatively inefficient because the firm is earning profits.

Quizplus · Accepted Answer

With a policy of marginal-cost pricing, the firm would produce where the marginal cost curve intersects the demand curve, which is where allocative efficiency is achieved because price equals marginal cost. In this case, the firm would produce 7 units and charge a price of $7. At this quantity, the firm would break even, earning zero economic profit.

The Diagram Below Shows the Market Demand Curve and the Cost