Allocative efficiency requires producing where P=MC. Clearly explain why any other output level is does not...

Allocative efficiency requires producing where P=MC. Clearly explain why any other output level is does not have allocative efficiency.

Expert Solution

Allocative efficiency occurs when the distribution of any goods or services is optimal according to consumer's preferences. Allocative efficiency occurs when the Price is equal to the Marginal Cost. In perfect competition, the equilibrium is at the point where Price (P) = Marginal Cost (MC).

To understand why allocative efficiency requires producing where P = MC, lets consider an example where P > MC. If at a quantity of 10 units, the marginal cost of producing the good for each unit is $6 but the market equilibrium price is $12 for each unit, then the the market equilibrium price is greater than the marginal cost. This shows there is under consumption in the society. In this case, if the firm increased production, the benefit the society would get would be higher than the cost of producing that good or service. Hence, if the quantity produced increased and price decreased until the Marginal Cost is equal to the Price, the society would be get benefit.

Similarly, lets consider the case where P < MC. For example, at a quantity of 30 units, the marginal cost of producing the good for each unit is $12 but the market equilibrium price is $6 for each unit, then the marginal cost is greater than the market equilibrium price. This shows there is over consumption in the society. In this case, if the firm continued to increase production, the cost of producing that good or the service would be higher than the benefit to the society. Hence, if the quantity produced decreased and the price increased until the Marginal Cost is equal to the Price, the firm would get benefit.

Hence, Allocative efficiency requires producing where P=MC

Rahul Sunny answered 1 year ago

Why is allocative efficiency achieved at a level of output where price = marginal cost? Provide...

Why is allocative efficiency achieved at a level of output where price = marginal cost? Provide a complete explanation that includes a discussion of from where the firm's marginal costs come.

Explain why this equation promotes efficiency: P=MC=MR=MU. Where does the price signal fit into efficiency? Answer...

Explain why this equation promotes efficiency: P=MC=MR=MU. Where does the price signal fit into efficiency? Answer this in relation to the equation. Define and give an example of a beneficial externality. Define and give an example of a detrimental externality.

If a firm is producing its output where MR=MC, but is suffering (economic) losses, then it...

If a firm is producing its output where MR=MC, but is suffering (economic) losses, then it must be the case that a) price is less than average total cost. b) price exceeds marginal cost. c) price is less than average variable cost. d) price equals marginal revenue.

1) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain. Productive efficiency is a situation...

1) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain. Productive efficiency is a situation in which the economy could not produce any more of one good without sacrificing production of another good. In other words, productive efficiency occurs when a good or a service is produced at the lowest possible cost. Productive efficiency can be defined as producing goods and services for the lowest cost. Productive efficiency does not imply allocative efficiency because a firm or an industry...

A. Explain in detail why a firm maximizes its profit by producing the level of output...

A. Explain in detail why a firm maximizes its profit by producing the level of output at which marginal revenue equals marginal cost. B. Explain in detail how mutual interdependence impacts oligopoly markets. C. Explain in detail how managers make use of Lock-in market power to increase market share for the firm.

explain why both monopolies and perfectly competitive firms produce the output where MR=MC. since MR=MC for...

explain why both monopolies and perfectly competitive firms produce the output where MR=MC. since MR=MC for both monopolies and perfectly competitive firms, why is the profit-maximizing price based on MR=MC higher than MC for the monopoly but equal to MC for perfect competition?

Explain why a firm maximizes its profits by producing the level of output at which marginal...

Explain why a firm maximizes its profits by producing the level of output at which marginal revenue equals marginal costs.

1)If a perfectly competitive firm is producing a quantity where P < MC, then profit: Group...

1)If a perfectly competitive firm is producing a quantity where P < MC, then profit: Group of answer choices a)can be increased by increasing production. b)is maximized. c)can be increased by decreasing the price. d)can be increased by decreasing production. 2)Which of the following accurately explains why firms in perfectly competitive markets are price takers? Group of answer choices a)prices in perfectly competitive markets are set by government regulation. b)prices in perfectly competitive markets are determined by the costs of...

1. Explain why the condition of production and allocative efficiency tend to not emerge in monopolistic...

1. Explain why the condition of production and allocative efficiency tend to not emerge in monopolistic markets. Explain why a firm should shut down when the given market price is below its average variable costs. 2. Explain why HHI measures are superior to the four-firm concentration ratio for assessing the level of potential market power in an industry. Explain why HHI measures are not effective at identifying potential collusion or price fixing in the industry.

A competitive firm has a marginal cost equal to: MC(y)=3y, where y is the output level....

A competitive firm has a marginal cost equal to: MC(y)=3y, where y is the output level. The intersection of the average cost and the marginal cost happens at output level equal to 4. How much will the firm produce in the long-run at price equal to $9?

Question