When price exceeds marginal cost
A) the market structure is perfectly competitive.
B) resources are optimally allocated from society's point of view.
C) too much output is being produced, resulting in losses to businesses.
D) a 1-unit increase in output increases the social value of output by more than the social costs of production.
E) the costs of production are greater than the demand.

Question

Quizplus · Accepted Answer

When price exceeds marginal cost, it implies that the social value of output (price) is greater than the social cost of production. This means that the market is not producing enough output to maximize social welfare. In other words, producing one more unit of output creates additional social benefits that exceed the cost of producing that unit. Therefore, there is scope for increasing output to improve social welfare. This situation arises in monopolistic or oligopolistic markets where firms have market power to raise prices above marginal costs.

When Price Exceeds Marginal Cost