Production occurs up to that level of output at which price
Blank
______ marginal cost, resulting in allocative efficiency under pure competition.

Question

Production occurs up to that level of output at which price 
Blank
______ marginal cost, resulting in allocative efficiency under pure competition.

BlackTom AI · Accepted Answer

First, let's restate the question and the options to set the scene. The prompt asks: Production occurs up to that level of output at which price ______ marginal cost, resulting in allocative efficiency under pure competition. The answer choices are: equals, doubles, is less than, is more than.

Option 1: equals. Under pure (perfect) competition, firms produce where price equals marginal cost (P = MC). This condition ensures that the value consumers place on the last unit produced equals the cost of producing that unit, which is the hallmark of allocative efficiency. When P = MC, resources are not wasted on overproduction or underproduction relative to consumer valuations. This makes the statement true in the context of perfectly competitive markets.

Option 2: doubles. If price were to double MC (P = 2 × MC), the price would exceed marginal cost, signaling an overvaluation of the marginal unit relative to its cost. In such a scenario, producing more would add more benefit than cost up to the point where MC catches up to price, but the condition P = MC would not hold, and the market would typically misallocate resources, leading to excess production and inefficiency rather than allocative efficiency.

Option 3: is less than. If price were below marginal cost (P < MC), the cost of producing the next unit would exceed the benefit consumers place on it. Firms would have little or no incentive to produce that unit, and output would be too low relative to the socially optimal level. This underproduction means allocative inefficiency because resources are not allocated to their highest-valued use.

Option 4: is more than. If price were above marginal cost (P > MC) for the next unit, producers would gain more from producing that unit than it costs, suggesting there is still unexploited welfare from additional output. However, without the condition P = MC, the market is not at the allocatively efficient point; any deviation means the quantity produced is not the socially optimal one, leading to potential deadweight loss.

A helpful way to connect these ideas is to remember that allocative efficiency in perfect competition occurs exactly at the intersection where price equals marginal cost, which aligns consumer valuations with the cost of resources used in production. The other three options describe alternative relationships between price and marginal cost that imply underproduction, overproduction, or a mismatch with the efficiency criterion, and thus do not represent the condition for allocative efficiency.

In summary, the option that aligns with the fundamental condition for allocative efficiency in a purely competitive market is the one stating that price equals marginal cost. This captures the essence of maximizing social welfare by equating marginal benefit with marginal cost at the chosen output level.

Production occurs up to that level of output at which price Blank ______ marginal cost, resulting in allocative efficiency under pure competition.

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