Multiple Choice
Which of the following statements best describes real-world allocative and productive efficiencies?
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0. Basic Principles of Economics
Allocative Efficiency, Productive Efficiency, and Equality
Multiple Choice
In determining the optimal level of output, a firm should aim for the point where:
A
total revenue equals total cost
B
marginal cost equals marginal benefit
C
marginal cost is greater than marginal revenue
D
average total cost is minimized
Verified step by step guidance1
Understand the concept of optimal output: A firm maximizes its profit by producing the quantity where the additional cost of producing one more unit (marginal cost) equals the additional benefit or revenue gained from selling that unit (marginal revenue or marginal benefit).
Recall the definitions: Marginal Cost (MC) is the increase in total cost from producing one more unit, and Marginal Benefit (MB) or Marginal Revenue (MR) is the increase in total revenue from selling one more unit.
Recognize that total revenue equals total cost is the break-even point, not necessarily the profit-maximizing output, so it is not the optimal output condition for profit maximization.
Note that if marginal cost is greater than marginal revenue, producing additional units would reduce profit, so the firm should not produce beyond the point where MC = MR.
Understand that minimizing average total cost relates to cost efficiency but does not guarantee profit maximization, which depends on the equality of marginal cost and marginal benefit.
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