Which of the following is most likely if all firms in a perfectly competitive market produce a quantity that is both allocatively and productively efficient?

Choose 1 answer:
(A) The market supply will shift right
(B) Firms are earning economic profits and more firms will enter this industry.
(C) The market is in long-run equilibrium.
(D) Firms are making economic losses and more firms will exit this industry.
(E) Firms will decrease their average total costs if they increase output

Question

Which of the following is most likely if all firms in a perfectly competitive market produce a quantity that is both allocatively and productively efficient?

Choose 1 answer:
(A) The market supply will shift right
(B) Firms are earning economic profits and more firms will enter this industry.
(C) The market is in long-run equilibrium.
(D) Firms are making economic losses and more firms will exit this industry.
(E) Firms will decrease their average total costs if they increase output

Accepted Answer

∻Solution∻ ‖ a ⋮ Allocative Efficiency: Allocative efficiency occurs when the price of the good equals the marginal cost of production ($P = MC$). This ensures that resources are allocated in a way that maximizes total surplus. ‖ ‖ b ⋮ Productive Efficiency: Productive efficiency occurs when firms produce at the lowest point on their average total cost curve ($ATC$). This means that firms are minimizing their costs of production. ‖ ‖ c ⋮ Long-Run Equilibrium: In a perfectly competitive market, if all firms are both allocatively and productively efficient, the market must be in long-run equilibrium. This is because, in the long run, firms will enter or exit the market until economic profits are zero, ensuring that $P = MC = ATC$. ‖ ∻Answer∻ ⚹ (C) The market is in long-run equilibrium. ⚹ ∻Key Concept∻ ⚹ Long-Run Equilibrium ⚹ ∻Explanation∻ ⚹ In a perfectly competitive market, if all firms are both allocatively and productively efficient, it indicates that the market is in long-run equilibrium. This is because, in the long run, firms will enter or exit the market until economic profits are zero, ensuring that price equals both marginal cost and average total cost. ⚹◊What is the relationship between allocative efficiency and productively efficiency in a perfectly competitive market according to microeconomic theory?⍭ Generate me a similar question◊

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