When all prices are set equal to marginal costs,
A)consumers buy more than they should.
B)consumers will get less utility.
C)markets are giving correct signals to consumers.
D)producers make excessive profits.

Question

Quizplus · Accepted Answer

When prices are set equal to marginal costs, markets are giving correct signals to consumers as the price reflects the actual cost of producing one additional unit. This leads to efficient allocation of resources as consumers are encouraged to consume only up to the point where the marginal benefit equals the marginal cost. Consequently, producers are able to earn a fair profit without causing market inefficiencies. Option A is incorrect as prices equal to marginal costs discourages over-consumption by consumers. Option B is incorrect as prices do not affect the utility received from the consumption of the good. Option D is incorrect as prices equal to marginal costs only allow producers to earn a fair return on investment and not excessive profits.

When All Prices Are Set Equal to Marginal Costs