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Chapter 8: Q.29 (page 212)

Will a perfectly competitive market display allocative efficiency? Why or why not?

Short Answer

Expert verified

Yes, in a completely competitive market, allocative efficiency stays true.

Step by step solution

01

Allocative efficiency :

The locations on the production possibility curve that are not representing proper resource usage but are socially advantageous, with social cost and benefit being equal.

02

Explanation :

Profits are maximised in a completely competitive market when the price equals the marginal cost. The MC is the social cost of production, and the price is paid in exchange for a social benefit gained from the good. That is, profits are highest when social cost equals social benefit.

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Most popular questions from this chapter

Your company operates in a perfectly competitive market. You have been told that advertising can help you increase your sales in the short run. Would you create an aggressive advertising campaign for your product?

Since a perfectly competitive firm can sell as much as it wishes at the market price, why can the firm not simply increase its profits by selling an extremely high quantity?

How does the average cost curve help to show whether a firm is making profits or losses?

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?

A firm鈥檚 marginal cost curve above the average variable cost curve is equal to the firm鈥檚 individual supply curve. This means that every time a firm receives a price from the market it will be willing to supply the amount of output where the price equals marginal cost. What happens to the firm鈥檚 individual supply curve if marginal costs increase?
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