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. Is this industry allocatively efficient?
A) It is not possible to say whether this industry is allocatively efficient because we do not know the market price for kilos of potatoes.
B) Yes, because output is equated for all firms.
C) It is not possible to say whether this industry is allocatively efficient because we do not know the average costs for each firm.
D) No, since marginal costs are not equated for all firms, the industry is not productively efficient, and thus cannot be allocatively efficient.
E) No, because the marginal cost curve for each firm has a different slope.

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. Is this industry allocatively efficient?
A) It is not possible to say whether this industry is allocatively efficient because we do not know the market price for kilos of potatoes. 
B) Yes, because output is equated for all firms. 
C) It is not possible to say whether this industry is allocatively efficient because we do not know the average costs for each firm. 
D) No, since marginal costs are not equated for all firms, the industry is not productively efficient, and thus cannot be allocatively efficient. 
E) No, because the marginal cost curve for each firm has a different slope.

Quizplus · Accepted Answer

Allocative efficiency occurs when the price of a good is equal to its marginal cost, and in this case, we do not know the market price for kilos of potatoes, so we cannot determine if the industry is allocatively efficient. However, we can determine that the industry is not productively efficient since the marginal costs are not equal for all firms, which implies that resources are not being allocated efficiently across firms in the industry. Therefore, the answer is D.

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