Question 1

What is allocative efficiency?

Accepted Answer

Allocative efficiency refers to a situation where resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. This means that resources are being used to produce goods and services that are most demanded by consumers at a price that reflects the true cost of production. At this point, it is not possible to make anyone better off without making someone else worse off. Therefore, allocative efficiency is achieved when resources are allocated in a way that maximizes social welfare.

Question 2

If a perfectly competitive firm achieves productive efficiency,then

Accepted Answer

Productive efficiency occurs when a firm is producing a good at the lowest possible cost. In a perfectly competitive market, firms cannot raise their prices above the market equilibrium price without losing customers to their competitors. Therefore, option A is incorrect. Option B describes allocative efficiency, which is when the price of the good is equal to the marginal cost of production and equals the benefit consumers receive from consuming the last unit sold. Option C refers to the minimum efficient scale, which is the output level at which the average total cost of producing a good is at its minimum. While this is related to productive efficiency, it is not the same thing.

Question 3

Which of the following describes a situation in which a good or service is produced at the lowest possible cost?

Accepted Answer

Productive efficiency refers to a situation in which a good or service is produced at the lowest possible cost, given the available technology and resources. This means that all factors of production are utilized in the most efficient way possible, and there is no wastage or redundancy in the production process. Allocative efficiency, on the other hand, refers to a situation in which resources are allocated in a way that maximizes social welfare, i.e., the benefits to society as a whole. Marginal efficiency and profit maximization are related to decision making and profit earning, respectively, and are not related to efficiency in production.

Question 4

If productive efficiency characterises a market,

Accepted Answer

Productive efficiency means that firms are producing output at the lowest possible cost. This implies that they are producing at the minimum point on their average total cost curve. This also means that the marginal cost of production is equal to the average total cost of production, and therefore, is minimised. However, it does not necessarily mean that firms are producing the goods that consumers desire most or using the best technology available to produce the good.

Question 5

Figure 8-15 
-Use the figure above to answer the following questions.
a.How can you determine that the figure represents a graph of a perfectly competitive firm? Be specific;indicate which curve gives you the information and how you use this information to arrive at your conclusion.
b.What is the market price?
c.What is the profit-maximising output?
d.What is total revenue at the profit-maximising output?
e.What is the total cost at the profit-maximising output?
f.What is the profit or loss at the profit-maximising output?
g.What is the firm's total fixed cost?
h.What is the total variable cost?
i.Identify the firm's short-run supply curve.
j.Is the industry in a long-run equilibrium?
k.If it is not in long-run equilibrium,what will happen in this industry to restore long-run equilibrium?
l.In long-run equilibrium,what is the firm's profit maximising quantity?

Accepted Answer

The answer of Figure 8-15 
-Use the figure above to...

Question 6

When plasma television sets were first introduced,prices were high and few firms were in the market.Later,economic profits attracted new firms,and the price of plasma televisions fell.This example illustrates

Accepted Answer

The answer of When plasma television sets were first introduced,prices...

Question 7

Figure 8-16 -Refer to Figure 8-16.If the market price is P₁,what is the allocatively efficient output level?

Accepted Answer

Allocative efficiency occurs when the marginal cost (MC) of production is equal to the market price (P), which results in producing the quantity where P=MC. In the graph, the intersection point of the MC and demand curve is at Q₁, which is the allocatively efficient output level.

Question 8

What is productive efficiency?

Accepted Answer

Productive efficiency is achieved when resources are allocated in a way that allows goods to be produced at their lowest possible average cost. This means that resources are being used in the most efficient way possible, minimizing waste and maximizing output. This type of efficiency ensures that consumers are able to purchase goods at a lower price, which in turn increases their purchasing power and overall welfare. Option A is related to allocative efficiency, option C is related to Pareto efficiency, and option D is not an accurate definition of productive efficiency.

Question 9

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

Accepted Answer

Allocative efficiency occurs when resources are allocated in a way that meets society's preferences, which is achieved when the marginal benefit to consumers equals the marginal cost of producing a good or service. This ensures that resources are not wasted and are instead used to produce the goods and services that society values the most.

Question 10

A perfectly competitive industry achieves allocative efficiency in the long run.What does allocative efficiency mean?

Accepted Answer

Allocative efficiency means that resources are allocated in such a way that the last unit produced provides a marginal benefit to society equal to its marginal cost. In a perfectly competitive industry, each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit, which ensures allocative efficiency. Therefore, choice A is the best answer.

Question 11

In the long run,perfectly competitive firms earn zero economic profit.Why do firms enter an industry when they know that in the long run they will not earn any profit?

Accepted Answer

The answer of In the long run,perfectly competitive firms earn...

Question 12

Why would a company continue to operate for many years while never once turning a profit rather than shut down immediately? Using revenue and cost analysis,explain when the company would shut down.

Accepted Answer

The answer of Why would a company continue to operate...

Question 13

Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market?

Accepted Answer

The answer of Which of the following describes a difference...

Question 14

If the long-run average cost curve is U-shaped,the optimal scale of production from society's viewpoint is

Accepted Answer

The U-shaped long-run average cost curve implies that there is an optimal scale of production beyond which the average cost of producing each unit of output begins to increase. This optimal scale is known as the Minimum Efficient Scale (MES) where the firm can produce at the lowest per unit cost possible. Thus, from society's viewpoint, the optimal scale of production is at the MES as it ensures that resources are being used efficiently, and the cost of production is minimized.

Question 15

Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium?

Accepted Answer

The answer of Which of the following does not hold...

Question 16

Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit.This condition is referred to as

Accepted Answer

This condition is known as allocative efficiency, where resources are being allocated in the most efficient way possible by producing the quantity of goods where marginal cost equals price. This ensures maximum social welfare and benefits for consumers and the economy as a whole.

Question 17

In early 2007,Pioneer and JVC,two Japanese electronics firms,each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets.Which of the following could explain why these firms did not simply raise their prices and increase their profits?

Accepted Answer

The intense competition between the two major producers pushed prices down. Each feared losing customers to the other if it raised its prices.

Question 18

Assume that the LCD and plasma television sets industry is perfectly competitive.Suppose a producer develops a successful innovation that enables it to lower its cost of production.What happens in the short run and in the long run?

Accepted Answer

In the short run, the firm will be able to increase its profits because it has lower costs of production due to the successful innovation. However, in the long run, other firms will copy the innovation which will eliminate the temporary increase in profits. In a perfectly competitive market, any increase in profits will attract new entrants which will decrease the price, ultimately bringing all firms to zero economic profits. Therefore, the firm will not be able to earn above normal profits indefinitely even if it obtains a patent for its innovation.

Question 19

The perfectly competitive market structure benefits consumers because

Accepted Answer

In a perfectly competitive market structure, firms are forced to be as efficient as possible due to the presence of many competitors, which benefits consumers in the form of lower prices and higher quality goods. Choices A and D are incorrect as they present ideas that are contrary to the benefits of a perfectly competitive market structure. Choice C is partially correct but does not fully capture the overall benefit to consumers.

Question 20

A perfectly competitive industry achieves allocative efficiency because

Accepted Answer

Allocative efficiency occurs when goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. In a perfectly competitive industry, firms produce at an output where market price equals marginal production cost, resulting in allocative efficiency. Therefore, choice B is correct. Choices A, C, and D may be characteristics found in a perfectly competitive industry but do not directly contribute to allocative efficiency.

Quiz 8: Firms in Perfectly Competitive Markets