Which of following best describes a perfectly competitive firm in the short run and the long run?

Choose 1 answer:
(A) Short run: productively efficient only; long run: allocatively efficient only
(B) Short run: neither allocatively efficient nor productively efficient; long run: neither allocatively efficient nor productively efficient
(c) Short run: allocatively efficient; long run: allocatively efficient and productively efficient
(D) Short run: allocatively efficient and productively efficient; long run: neither allocatively efficient nor productively efficient
(E) Short run: neither allocatively efficient nor productively efficient; long run: allocatively efficient and productively efficient

Question

Which of following best describes a perfectly competitive firm in the short run and the long run?

Choose 1 answer:
(A) Short run: productively efficient only; long run: allocatively efficient only
(B) Short run: neither allocatively efficient nor productively efficient; long run: neither allocatively efficient nor productively efficient
(c) Short run: allocatively efficient; long run: allocatively efficient and productively efficient
(D) Short run: allocatively efficient and productively efficient; long run: neither allocatively efficient nor productively efficient
(E) Short run: neither allocatively efficient nor productively efficient; long run: allocatively efficient and productively efficient

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative Efficiency: Allocative efficiency occurs when a firm produces at a point where price equals marginal cost ($P = MC$). In a perfectly competitive market, this condition is met in both the short run and the long run. ‖ ‖ b ⋮ Productive Efficiency: Productive efficiency is achieved when a firm produces at the lowest point on its average total cost curve ($ATC$). In the long run, perfectly competitive firms achieve productive efficiency as they can adjust all inputs and reach the minimum point of their $ATC$. In the short run, however, firms may not be productively efficient as they operate with fixed inputs and may not be at the minimum $ATC$. ‖ ‖ c ⋮ Long-run Equilibrium: In the long run, perfectly competitive firms achieve both allocative and productive efficiency due to the entry and exit of firms, which ensures that firms are producing at the minimum $ATC$ and $P = MC$. ‖ ‖ d ⋮ Short-run Possibilities: In the short run, perfectly competitive firms can be allocatively efficient ($P = MC$) but not necessarily productively efficient, as they may not be at the minimum of their $ATC$ curve due to fixed inputs. ‖ ∻Answer∻ ⚹ (C) Short run: allocatively efficient; long run: allocatively efficient and productively efficient ⚹ ∻Key Concept∻ ⚹ Efficiency in Perfect Competition ⚹ ∻Explanation∻ ⚹ In the short run, a perfectly competitive firm can achieve allocative efficiency but not necessarily productive efficiency. In the long run, it achieves both allocative and productive efficiency due to the flexibility of adjusting all inputs and the market mechanism of entry and exit. ⚹◊What impact does perfect competition have on the efficiency of a firm in the short run and long run in terms of allocative and productive efficiency?⍭ Generate me a similar question◊

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