In comparing market structures, which condition indicates that a market achieves allocativ… — JAMB UTME

In comparing market structures, which condition indicates that a market achieves allocative efficiency and maximizes consumer welfare?

Price equals marginal cost ( $P = MC$ )Answer
B
Marginal revenue equals marginal cost ( $MR = MC$ )
C
Price equals average variable cost ( $P = AVC$ )
D
Price exceeds marginal cost ( $P > MC$ )

Answer

Price equals marginal cost (

P = MC

)

Allocative efficiency requires that the value consumers place on the final unit produced equals the cost of the resources used to make it (

P = MC

). This ensures maximum net social benefit and consumer welfare.

Step-by-Step Solution

Identify the economic definition of allocative efficiency.

Allocative efficiency occurs when resources are allocated to produce the exact combination of goods and services most desired by society, which requires that the price consumers pay equals the marginal cost of production (

P = MC

Price reflects the marginal benefit to consumers, while marginal cost reflects the opportunity cost of producing the last unit.

Evaluate market structures using this efficiency condition.

Perfect competition achieves

P = MC

in long-run equilibrium because competitive firms face a horizontal demand curve (

P = MR

). Imperfect markets, such as monopolies, charge a price higher than marginal cost (

P > MC

Monopolists restrict output to maximize profit where

MR = MC

, resulting in price exceeding marginal cost and causing a loss of consumer welfare.

Key Concept

Allocative Efficiency in Market Structures

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