Which of the following is true if typical firms in a perfectly competitive market are allocatively efficient and produce at the lowest possible cost per unit?

Choose 1 answer:
(A) Firms are making economic losses and more firms will exit this industry.
(B) Firms will decrease their average total costs if they increase output
(c) The market is in long-run equilibrium.

D The market supply will shift right
(E) Firms are earning economic profits and more firms will enter this industry.

Question

Which of the following is true if typical firms in a perfectly competitive market are allocatively efficient and produce at the lowest possible cost per unit?

Choose 1 answer:
(A) Firms are making economic losses and more firms will exit this industry.
(B) Firms will decrease their average total costs if they increase output
(c) The market is in long-run equilibrium.

D The market supply will shift right
(E) Firms are earning economic profits and more firms will enter this industry.

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative Efficiency: Allocative efficiency in a perfectly competitive market occurs when firms produce the quantity of output where the price equals the marginal cost, $P = MC$. This condition ensures that resources are allocated to their most valued use. ‖ ‖ b ⋮ Productive Efficiency: Productive efficiency is achieved when firms produce at the lowest possible cost per unit, which occurs at the minimum point of the average total cost curve, $ATC$. ‖ ‖ c ⋮ Long-run Equilibrium: In the long run, perfectly competitive markets reach an equilibrium where firms earn zero economic profit, as any economic profits or losses would lead to entry or exit from the market until only normal profits remain. ‖ ∻Answer∻ ⚹ (C) The market is in long-run equilibrium. ⚹ ∻Key Concept∻ ⚹ Long-run Equilibrium in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, long-run equilibrium is achieved when firms are both allocatively and productively efficient, resulting in zero economic profits.◊What factors would cause a perfectly competitive market to move away from allocative efficiency and incur economic losses?⍭ Generate me a similar question◊⚹

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