Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms. FIGURE 12- 1
-Refer to Figure 12- 1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Which of the following statements correctly describes the productive efficiency of this industry?
A) The total output of 1500 kilos is the productively efficient output for this industry, so no reallocation is necessary.
B) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product.
C) Productive efficiency would be achieved if Firm B produced all the output, since it has the lowest MC for the production of 500 kilos.
D) It is not possible to say whether this industry is productively efficient because we do not know the average costs for each firm.
E) It is possible to reduce the total cost of the given output by reallocating production among the three firms.

Question

Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.  FIGURE 12- 1
-Refer to Figure 12- 1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Which of the following statements correctly describes the productive efficiency of this industry?
A) The total output of 1500 kilos is the productively efficient output for this industry, so no reallocation is necessary. 
B) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product. 
C) Productive efficiency would be achieved if Firm B produced all the output, since it has the lowest MC for the production of 500 kilos. 
D) It is not possible to say whether this industry is productively efficient because we do not know the average costs for each firm. 
E) It is possible to reduce the total cost of the given output by reallocating production among the three firms.

Quizplus · Accepted Answer

Productive efficiency is achieved when the total output is produced at the lowest possible cost. In this case, it is possible to reduce the total cost of the given output by reallocating production among the three firms. For example, if Firm B produced all 1500 kilos of potatoes, the total cost would be lower than if Firms A, B, and C each produced 500 kilos.

Consider Three Firms, A, B and C, All Producing Kilos