Sia
Question
Macroeconomics
Posted 6 months ago
All of the following are allocatively efficient EXCEPT which option?
Choose 1 answer:
(A) A perfectly competitive firm earning positive economic profit in the short run
(B) A single-price monopolist
(c) A perfectly competitive firm earning normal economic profit in the long run
(D) A perfectly competitive firm earning negative economic profit in the short run.
(E) A perfectly price discriminating monopolist
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Answer from Sia
Posted 6 months ago
Solution
a
Allocative Efficiency: Allocative efficiency occurs when the price of a good equals the marginal cost (MC) of production, which is the condition under perfect competition in the long run
b
Monopoly and Allocative Efficiency: A single-price monopolist does not achieve allocative efficiency because it sets price (P) greater than marginal cost (MC), P > MC, to maximize profits, leading to a deadweight loss
c
Perfect Price Discrimination: A perfectly price discriminating monopolist can achieve allocative efficiency by charging each consumer their maximum willingness to pay, which equates the price with the marginal cost for each unit sold
Answer
(B) A single-price monopolist
Key Concept
Allocative Efficiency and Market Structures
Explanation
Allocative efficiency is achieved when the price equals marginal cost. Perfect competition in the long run and perfect price discrimination by a monopolist can achieve this, but a single-price monopolist cannot because it sets price above marginal cost.
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