An economy with no market failures and all industries are in a competitive long- run equilibrium is one where
1. allocative efficiency is achieved;
2. the economy is on the production possibilities boundary;
3. there is no incentive for firms to enter or leave industries.
A) 1 and 3
B) 2 and 3
C) 1 and 2
D) 1, 2, and 3
E) 2 only

Question

Quizplus · Accepted Answer

- Choice 1 is correct because in a competitive long-run equilibrium, the market will achieve allocative efficiency where the marginal cost of production equals the price consumers are willing to pay for the good or service.
- Choice 2 is correct because in this equilibrium, all resources are being fully utilized and the economy is producing at its maximum potential.
- Choice 3 is correct because in a competitive market, there are no economic profits to be made, so there is no incentive for firms to enter or leave the industry. This implies that the number of firms in the industry is optimal for efficiency.

An Economy with No Market Failures and All Industries Are