When a purely competitive firm is in long-run equilibrium, it is said to achieve allocative efficiency because
A) total revenue is at a maximum.
B) marginal cost equals marginal revenue.
C) average cost equals marginal cost.
D) average cost is at a minimum.

Question

Quizplus · Accepted Answer

When a purely competitive firm is in long-run equilibrium, it produces where the marginal cost (MC) equals marginal revenue (MR). At this point, price is equal to both MC and MR. This implies that the firm is producing at the lowest possible long-run average cost (LRAC) for that level of output. Therefore, the firm achieves allocative efficiency, which means that resources are allocated in the most efficient way from society's point of view. Choice A is incorrect because total revenue being at a maximum does not necessarily indicate allocative efficiency. Choice C is incorrect because average cost equals marginal cost does not necessarily indicate allocative efficiency. Choice D is incorrect because average cost being at a minimum does not necessarily indicate allocative efficiency.

When a Purely Competitive Firm Is in Long-Run Equilibrium, It