The condition for allocative efficiency is

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BlackTom AI · Accepted Answer

To analyze the statement, we consider what allocative efficiency means in typical microeconomics terms.
Option a: 'price is equal to marginal cost.' This aligns with the standard condition for allocative efficiency, where resources are allocated such that the price (reflecting society’s willingness to pay) equals the marginal cost of producing an additional unit. When P = MC, the value consumers place on the last unit produced matches the cost of producing it, indicating efficient resource allocation.
Option b: 'price is higher than average cost.' This describes a situation where a firm earns positive economic profits and might indicate productive efficiency to some extent, but it does not ensure allocative efficiency. Price above average cost focuses on profitability rather than the alignment of price with marginal cost for society’s benefit.
Option c: 'marginal cost is equal to marginal revenue.' This condition describes profit maximization in a competitive market or for a firm deciding output to maximize short-run profits, not allocative efficiency. It concerns the firm’s output level, not the overall efficiency of resource allocation in the economy.
Option d: 'average costs are at a minimum.' This reflects productive efficiency—minimizing average cost—rather than allocative efficiency. A firm could be productively efficient without pricing at MC or achieving allocative efficiency across the economy as a whole.
In summary, the key concept of allocative efficiency centers on P = MC, while the other options describe either profitability conditions (c), or would indicate productive efficiency (d), or do not directly address the alignment of price with marginal cost (b).

MUF0061 Economics Unit 1 - Semester 1, 2025 Revision Quiz - Efficiency of Perfect Competition and Monopoly (10 - 12 minutes)

The condition for allocative efficiency is

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