Which of the following statements is true?
A)As a consequence of the monopoly firm producing the quantity of output at which price equals marginal cost, it is resource allocative efficient.
B)As a consequence of the perfectly competitive firm producing the quantity of output at which price equals marginal cost, it is resource allocative efficient.
C)As a consequence of the perfectly competitive firm producing the quantity of output at which price equals marginal cost, it is productive efficient.
D)As a consequence of the monopoly firm producing the quantity of output at which price equals marginal cost, it is productive efficient.

Question

Quizplus · Accepted Answer

In perfect competition, firms produce where price equals marginal cost (P=MC). This ensures allocative efficiency, meaning that resources are allocated in the most efficient way possible. However, it does not guarantee productive efficiency. In a monopoly, the firm will not produce where P=MC because they have market power and can set their own price. Therefore, they will produce at a higher price and lower quantity, leading to a lack of allocative efficiency. While the monopoly may be productive efficient if they produce at the lowest possible average cost, they are not allocatively efficient.

Which of the Following Statements Is True