The condition for allocative efficiency is

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BlackTom AI · Accepted Answer

The question asks about the condition for allocative efficiency and provides four answer choices.

Option a: price is higher than average cost. This condition describes a situation where a firm earns supernormal profits and is not directly tied to allocative efficiency. Allocative efficiency concerns the optimal distribution of resources where price reflects the value to consumers (marginal benefit) and the opportunity cost to society (marginal cost). Being merely higher than average cost does not ensure that price equals the marginal cost of the last unit produced, so this option does not capture the fundamental efficiency criterion.

Option b: price is equal to marginal cost. This is the classic condition for allocative efficiency in perfect competition: consumers value the last unit produced (marginal benefit, reflected in price) as much as it costs society to produce that unit (marginal cost). When P = MC, resources are allocated so that the net value of additional units is zero, preventing over- or under-production in the long run. This alignment directly ties consumer valuation to production cost, which is the essence of allocative efficiency.

Option c: marginal cost is equal to marginal revenue. This condition is central to profit maximization for a firm in imperfect competition, not to allocative efficiency. MC = MR determines the output level that maximizes a firm’s profit, but it does not ensure that the price consumers pay reflects the true social value of the resource unless the market is perfectly competitive. Therefore, MC = MR describes a different objective than allocative efficiency.

Option d: average costs are at a minimum. This describes productive efficiency (minimizing average cost) rather than allocative efficiency. It concerns how efficiently inputs are transformed into output, not how the price relates to the marginal cost of the last unit produced or how resources are valued by consumers. Hence, this option does not capture the allocative condition.

In summary, evaluating the link between price and marginal cost shows that the allocative efficiency criterion hinges on P = MC, while the other options describe either profit-maximization (MC = MR) or productive efficiency (minimizing average cost) or metrics not directly tied to the allocation of resources.

The condition for allocative efficiency is

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