A competitive market maximizes social welfare because in a competitive market,
A) profits are zero.
B) price equals marginal cost of the last unit produced.
C) price equals average cost of the last unit produced.
D) there is free entry and exit.

Question

Quizplus · Accepted Answer

In a competitive market, price equals the marginal cost of the last unit produced, which means that the market is producing at the point where the marginal benefit of the last unit produced is equal to its marginal cost. This maximizes social welfare as it ensures that resources are allocated efficiently and consumers are paying the true cost of production. Profits may not necessarily be zero in a competitive market, but they are minimized due to the presence of competition. Free entry and exit facilitate competition and prevent potential monopolies from taking advantage of consumers. Choice C is incorrect as average cost includes fixed costs, which do not factor into a firm's decision to produce one more unit in the short run.

A Competitive Market Maximizes Social Welfare Because in a Competitive