Multiple Choice
Suppose a production possibilities frontier (PPF) graph shows points A, B, and C. Point B is where the marginal benefit equals the marginal cost of production. Which point is considered allocatively efficient?
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0. Basic Principles of Economics
Allocative Efficiency, Productive Efficiency, and Equality
Multiple Choice
Economic efficiency in a competitive market is achieved when:
A
the government sets prices to ensure equality
B
all firms earn zero economic profit
C
resources are allocated such that marginal benefit equals marginal cost
D
total output is maximized regardless of consumer preferences
Verified step by step guidance1
Understand the concept of economic efficiency: it occurs when resources are allocated in a way that maximizes total surplus, meaning no one can be made better off without making someone else worse off.
Recall that in a competitive market, economic efficiency is achieved when the marginal benefit (MB) to consumers equals the marginal cost (MC) of production, ensuring optimal allocation of resources.
Recognize that setting prices by the government or firms earning zero economic profit are conditions related to market structure or long-run equilibrium, but they do not directly define economic efficiency.
Note that maximizing total output without considering consumer preferences can lead to inefficiency because it ignores whether the output matches what consumers value.
Conclude that the key condition for economic efficiency is when \(\text{MB} = \text{MC}\), as this balances the value consumers place on goods with the cost of producing them.
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