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Question
Microeconomics
Posted 2 months ago

Which of the following describes the conditions that exist in a perfectly competitive market in the short run, and which are associated with firms leaving the market in the long run?

Choose 1 answer:
(A) P=ATC,P>MCP=A T C, P>M C, productive efficiency
(B) P<ATC,P=MCP<A T C, P=M C, allocative efficiency
(C) P>ATC,P=MCP>A T C, P=M C, productive efficiency
(D) P<ATC,P>MCP<A T C, P>M C, allocative efficiency
(E) P=ATC,P=MCP=A T C, P=M C, productive efficiency and allocative efficiency
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Answer from Sia
Posted 2 months ago
Solution
a
In a perfectly competitive market in the short run, firms may experience different relationships between price (P), average total cost (ATC), and marginal cost (MC)
b
If P<ATCP < ATC and P=MCP = MC, firms are not covering their average total costs, which indicates they are making losses. This situation is associated with allocative efficiency because P=MCP = MC means that resources are being allocated efficiently
c
In the long run, firms that are making losses (P<ATCP < ATC) will exit the market
Answer
(B) P<ATC,P=MCP < ATC, P = MC, allocative efficiency
Key Concept
Allocative efficiency occurs when P=MCP = MC, indicating that resources are being used where they are most valued.
Explanation
In the short run, if P<ATCP < ATC and P=MCP = MC, firms are making losses and will exit the market in the long run. This condition is associated with allocative efficiency because P=MCP = MC.

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