Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true?

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We start by restating the question and the options to ensure clarity about what is being analyzed. Question: Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true? Answer options: - Price equals marginal revenue. - Price is greater than marginal cost. - Price is less than marginal revenue. - Price is less than marginal benefit. - Price equals average total cost. Option 1: Price equals marginal revenue. In imperfect competition, a firm faces a downward-sloping demand curve, so to sell an additional unit, it must lower the price, which means marginal revenue is less than price (MR < P). Profit-maximizing output is determined where MR = MC, not where price equals MR. Therefore, this option misstates the relationship because P typically differs from MR in this setting. Option 2: Price is greater than marginal cost. This option aligns with the typical outcome in imperfect competition at the profit-maximizing quantity. Since the firm sets MR = MC, and the demand curve is downward sloping, the price that consumers are willing to pay at that quantity exceeds the marginal cost of producing that extra unit (P > MC). This divergence between price and marginal cost is the hallmark of market power and is the core reason why allocative efficiency (where P = MC) is not achieved. Thus, this statement correctly captures the allocative inefficiency present in imperfect competition. Option 3: Price is less than marginal revenue. As noted earlier, in downward-sloping demand, MR is less than price (MR < P). The condition P < MR would imply an unusual and inconsistent pricing scenario for a profit-maximizing firm in this context; it would blur the standard MR = MC rule and is not what drives the typical outcome in imperfect competition. Therefore, this option is incorrect. Option 4: Price is less than marginal benefit. Marginal benefit to society generally equals the marginal value to consumers, which in many analyses corresponds to price in a simple demand framework. However, the key point for the firms’ profit-maximizing condition is MR = MC, not a direct statement about P relative to marginal benefit in the market. Moreover, in imperfect competition, P often exceeds MC, not necessarily being governed by a direct comparison to marginal benefit. This option mixes consumer willingness-to-pay with producer pricing in a way that does not specify the profit-maximizing condition. Option 5: Price equals average total cost. If price equaled ATC, the firm would earn zero economic profit in the short run (ignoring other dynamics). While zero profit could occur under certain circumstances, the standard description of profit maximization for a monopolistic or imperfectly competitive firm is MR = MC, with P typically above MC and potentially above ATC depending on the situation. Therefore, this option does not express the fundamental profit-maximizing condition that leads to P > MC and allocative inefficiency. Summary of reasoning across options: - The correct depiction of profit maximization in imperfect competition is MR = MC, coupled with a downward-sloping demand curve which implies P > MC at the chosen output. This creates a gap between price and marginal cost and results in allocative inefficiency. - The other options either misstate the relationship between price, marginal revenue, and marginal cost, or rely on conditions (like P = ATC or P < MR) that do not match the standard mechanism by which imperfectly competitive firms maximize profit.

AP Economics-Hillebrand Micro Unit 4 Exam v2- Requires Respondus LockDown Browser

Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true?

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AP Economics-Hillebrand Micro Unit 4 Exam v2- Requires Respondus LockDown Browser

Imperfectly competitive markets do not achieve allocative efficiency because profit maximization for each firm occurs when which of the following is true?

View Explanation

Log in for full answers

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