-Refer to Figure 4 -5. The figure above represents the market for iced tea. Assume that this is a competitive market. At a price of US$3
A) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently low.
B) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently high.
C) the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently low.
D) producers should lower the price to US$1 in order to sell the quantity demanded of 10,000.

Question

-Refer to Figure 4 -5. The figure above represents the market for iced tea. Assume that this is a competitive market. At a price of US$3
A) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently low. 
B) the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently high. 
C) the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently low. 
D) producers should lower the price to US$1 in order to sell the quantity demanded of 10,000.

Quizplus · Accepted Answer

In a competitive market, the point where the demand curve (representing marginal benefit) intersects the supply curve (representing marginal cost) indicates the efficient output level and price. If the price is set above this equilibrium, the marginal benefit of consuming an additional unit of the good (as indicated by the demand curve) is greater than the marginal cost of producing it (as indicated by the supply curve), leading to a situation where output is inefficiently low because at that price, consumers' willingness to pay exceeds the cost of production, suggesting that more of the good should be produced to reach efficiency.