Efficiency in a market occurs when the production of the good is such that
A) marginal benefit exceeds marginal cost.
B) marginal benefit equals marginal cost.
C) marginal benefit is lower than marginal cost.
D) the marginal cost stops increasing.
E) marginal benefit exceeds marginal cost by the maximum amount possible.

Question

Quizplus · Accepted Answer

Efficiency in a market occurs when the production of a good is such that the marginal benefit equals marginal cost. This is referred to as allocative efficiency, as resources are allocated to satisfy consumer preferences at the lowest possible cost. If marginal benefit is higher than marginal cost, it suggests that consumers are willing to pay more for the additional marginal unit, and therefore not producing that additional unit would result in a net loss in satisfaction. If marginal benefit is lower than marginal cost, it suggests that the cost of production of the additional unit is higher than the benefit that consumers would receive, and therefore producing that unit would result in a loss. Therefore, the only option that accurately reflects efficiency in a market is when marginal benefit equals marginal cost.

Efficiency in a Market Occurs When the Production of the Good