If a firm operates in a perfectly competitive market, what must be true about the firm's efficiency in the short run and the long run?

Choose 1 answer:
(A) Neither allocatively efficient nor productively efficient in the short run; neither allocatively efficient nor productively efficient in the long run
(B) Allocatively efficient and productively efficient in the short run; neither allocatively efficient nor productively efficient in the long run
(c) Allocatively efficient in the short run; both allocatively efficient and productively efficient in the long run
(D) Productively efficient in the short run; allocatively efficient but not productively efficient in the long run
(E) Neither allocatively efficient nor productively efficient in the short run; Both allocatively efficient and productively efficient in the long run

Question

If a firm operates in a perfectly competitive market, what must be true about the firm's efficiency in the short run and the long run?

Choose 1 answer:
(A) Neither allocatively efficient nor productively efficient in the short run; neither allocatively efficient nor productively efficient in the long run
(B) Allocatively efficient and productively efficient in the short run; neither allocatively efficient nor productively efficient in the long run
(c) Allocatively efficient in the short run; both allocatively efficient and productively efficient in the long run
(D) Productively efficient in the short run; allocatively efficient but not productively efficient in the long run
(E) Neither allocatively efficient nor productively efficient in the short run; Both allocatively efficient and productively efficient in the long run

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative Efficiency: Allocative efficiency occurs when goods are distributed according to consumer preferences; in other words, when price equals marginal cost ($P = MC$). In a perfectly competitive market, firms are allocatively efficient in the short run because they take the market price as given, which equals marginal cost. ‖ ‖ b ⋮ Productive Efficiency: Productive efficiency occurs when goods are produced at the lowest possible cost, which happens when firms operate at the minimum of their average total cost ($ATC$) curve. In the long run, perfectly competitive markets lead to productive efficiency as firms can adjust their scale of operation and new firms can enter or exit the market. ‖ ‖ c ⋮ Long-Run Equilibrium: In the long run, perfectly competitive firms must be both allocatively and productively efficient due to the entry and exit of firms, which ensures that firms earn normal profit ($\pi = 0$) and operate at the minimum of their $ATC$ curve. ‖ ∻Answer∻ ⚹ (C) Allocatively efficient in the short run; both allocatively efficient and productively efficient in the long run ⚹ ∻Key Concept∻ ⚹ Efficiency in Perfect Competition ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, firms are allocatively efficient in the short run and both allocatively and productively efficient in the long run due to the forces of market entry and exit leading to a zero-profit equilibrium. ⚹◊What is the formula to calculate allocative efficiency in a perfectly competitive market?⍭ Generate me a similar question◊

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