To be efficient, a competitive equilibrium must satisfy substitution efficiency.

Question

Quizplus · Accepted Answer

Substitution efficiency means that goods are allocated to consumers based on their preferences and relative prices. A competitive equilibrium ensures that prices are set at a level where consumers make optimal consumption choices based on their preferences and the prices of the commodities available in the market. Therefore, a competitive equilibrium inherently satisfies substitution efficiency. Substitution efficiency means that resources are allocated in a way that best reflects consumer preferences, and a competitive equilibrium achieves this by ensuring that prices adjust to clear markets and reflect the relative scarcity of goods and services.

To Be Efficient, a Competitive Equilibrium Must Satisfy Substitution Efficiency