Question

1. “In the short run, a company has to operate as efficient as possible to accomplish the profit maximization goal”.

To what extent would you accept this argument? If achieving efficiency is not attainable in the short run, what should the company do? Explain your answer.

Answer 1

Allocative efficiency occurs when it is nearly impossible to obtain any net gains for society with alteration the combination of products and services which are produced from limited supply of resources in society. Mathematically the allocative efficiency is situation when in all parts of the economy the price equals marginal cost. Thus at the ruling price, producer as well as consumer surplus are maximised. Productive efficiency is situation where at the lowest possible cost the output is being produced, thus means where the firm is producing on the bottom point of its average total cost curve. But the marginal cost curve always passes through the lowest point of the average cost curve, thus the productive efficiency is achieved when MC= AC. It is attained in the long run for a perfect competition market. The firms with high unit costs may exit the industry when the market price is driven down by the forces of competition. Thus the firms not always may produce at a quantity where P=MR=ATC, which could be the an argument for inefficiency, thus would always always nake production at a profit-maximizing quantity; this is what firms usually in the short and long run