The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost, D = demand, and MR = marginal revenue.

Which Q and P represents allocative efficiency?

Question

The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost, D = demand, and MR = marginal revenue.

Which Q and P represents allocative efficiency?

BlackTom AI · Accepted Answer

First, identify what allocative efficiency means in this monopoly diagram: it occurs where price equals marginal cost (P = MC) and the quantity produced is such that the value to consumers (as shown by the demand curve, D) equals the cost of producing that unit (MC). In other words, the allocatively efficient point is the intersection of the MC curve with the demand curve, yielding the corresponding quantity and price.

Option A: Q1 and P4. If Q1 were paired with P4, we would need to check whether MC at Q1 equals the price P4 implied by the demand curve. In most monopoly-drawn graphs, P4 is a relatively high price level, while Q1 is a relatively low quantity. At such a low quantity, MC is typically higher than P4 or the P would not line up with MC on the demand curve. This combination does not coincide with MC intersecting D, so it is unlikely to be allocatively efficient.

Option B: Q3 and P2. Here, Q3 is a relatively high quantity and P2 is a mid-level price. If the MC curve intersects the demand curve at the quantity that yields P2, then this would be the allocatively efficient point. In the provided diagram, the dashed lines suggest that the intersection of MC with D occurs at a quantity corresponding to Q3 and a price corresponding to P2, aligning P = MC with the demand price level.

Option C: Q1 and P1. This pairing uses the smallest quantity with the lowest price level. At such a low output, MC is typically rising and may be above P1 or below P1 depending on the specific curves, but the combination does not reflect MC meeting D at that quantity, so it’s unlikely to be the allocative efficient point.

Option D: Q1 and P2. This would indicate a low quantity with a mid-level price. Unless MC exactly equals P2 at Q1 and MC intersects D there, which is unlikely given the graph’s geometry, this is not the standard allocative-efficient point since Q1 is too small for MC to equal the consumer price determined by demand.

Option E: Q2 and P3. This pairing is plausible in some diagrams for other concepts (like excess capacity or deadweight considerations), but allocative efficiency specifically requires P = MC with D at that quantity. If the MC-D intersection occurs to the right of Q2, or if P3 does not equal MC at Q2, this would not be the allocatively efficient point.

In summary, the allocatively efficient point is where the MC curve intersects the demand curve, yielding the corresponding quantity and price on those curves. Among the provided options, Q3 and P2 best fit that condition, since they reflect the MC-D intersection implied by the graph’s dashed indicators. The other pairings fail to match MC = P on the demand schedule or place the quantity at a point where MC would not equal the price consumers are willing to pay.

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

The following questions refer to the monopoly graph below, where MC = marginal cost, ATC = average total cost, D = demand, and MR = marginal revenue. Which Q and P represents allocative efficiency?

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