What is meant by allocative efficiency? How does perfect competition lead to allocative efficiency?

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Elin HesselLv2

28 Feb 2020

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Does the market system result in allocative efficiency? In the long run, perfect competition

A. results in allocative efficiency because firms produce where price equals marginal cost.

B. does not result in allocative efficiency because firms enter and exit until they break even where price equals minimum average cost.

C. results in allocative efficiency because firms produce where the marginal benefit consumers receive from consuming the last unit of the good sold is greater than marginal cost.

D. does not result in allocative efficiency because price does not equal the marginal benefit consumers receive from consuming the last unit of the good sold.

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Refer to the diagram. At output level Q1:

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