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) $P=A T C, PM C$, productive efficiency (B) $PA T C, P=M C$, productive efficiency (D) $P M C$, allocative efficiency (E) $P=A T C, P=M C$, productive efficiency and allocative efficiency

Question

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) $P=A T C, P>M C$, productive efficiency (B) $PA T C, P=M C$, productive efficiency (D) $P M C$, allocative efficiency (E) $P=A T C, P=M C$, productive efficiency and allocative efficiency

Accepted Answer

∻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 $P < ATC$ and $P = MC$, firms are not covering their average total costs, which indicates they are making losses. This situation is associated with allocative efficiency because $P = MC$ means that resources are being allocated efficiently. ‖ ‖ c ⋮ In the long run, firms that are making losses ($P < ATC$) will exit the market. ‖ ∻Answer∻ ⚹ (B) $P < ATC, P = MC$, allocative efficiency ⚹ ∻Key Concept∻ ⚹ Allocative efficiency occurs when $P = MC$, indicating that resources are being used where they are most valued. ⚹ ∻Explanation∻ ⚹ In the short run, if $P < ATC$ and $P = MC$, firms are making losses and will exit the market in the long run. This condition is associated with allocative efficiency because $P = MC$. ⚹◊What is the relationship between price, average total cost, and marginal cost in a perfectly competitive market in the short run?⍭ Generate me a similar question◊

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