The diagram below shows demand and supply curves for some perfectly competitive market. FIGURE 16-2 -Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there are no externalities in production.In this case,________ for allocative efficiency. A)P₁ and Q₁are appropriate B)the price P₁ is appropriate but the quantity Q₁is too low C)the price P₁ is appropriate but the quantity Q₁is too high D)the price P₁ is too low but the quantity Q₁is appropriate E)the price P₁ is too high but the quantity Q₁is appropriate

Question

Quizplus · Accepted Answer

Allocative efficiency occurs when marginal benefit (MB) equals marginal cost (MC). In a perfectly competitive market with no externalities, the supply curve represents marginal cost. The intersection of the MB curve and the supply curve is at point B1, where the price is P₁ and the quantity demanded and supplied is Q₁. Therefore, P₁ and Q₁ are appropriate for allocative efficiency.

The Diagram Below Shows Demand and Supply Curves for Some