Competitive markets do NOT result in:
a.the largest possible economic profit for firms.
b.goods going to the consumers who will receive the highest marginal benefit from the good.
c.the largest possible economic surplus.
d.goods produced at the lowest possible marginal cost.
The correct answer and explanation is:
Correct Answer: A. The largest possible economic profit for firms.
Explanation:
Competitive markets are characterized by many buyers and sellers, free entry and exit, and firms producing identical or similar products. In such markets, firms operate under conditions of perfect competition, meaning they are price takers rather than price makers.
One of the key features of perfect competition is that firms can only earn normal profit in the long run. This is because if firms in a competitive market earn economic profit (profit above the normal return), new firms will be attracted to the market due to low entry barriers. As new firms enter, supply increases, pushing the price down until profits are driven to zero (normal profit level). Conversely, if firms are making losses, some will exit the market, reducing supply and pushing prices back up to normal profit levels.
On the other hand, competitive markets do ensure that:
- Goods go to consumers who receive the highest marginal benefit (option B). Since consumers make purchasing decisions based on their willingness to pay, those who value the product most will obtain it.
- The largest possible economic surplus is achieved (option C). Economic surplus is the sum of consumer and producer surplus, and in a perfectly competitive market, this is maximized because prices reflect marginal costs.
- Goods are produced at the lowest possible marginal cost (option D). Firms minimize costs and operate efficiently to remain competitive, ensuring production occurs at the lowest possible marginal cost.
Thus, the primary drawback of competitive markets for firms is that they do not allow them to achieve the largest possible economic profit in the long run, making option A the correct answer.
Now, I’ll generate an image related to competitive markets.
Here is an illustration of a competitive market scene, showcasing many small businesses selling identical products in an open marketplace with active consumers and fair pricing. Let me know if you need any modifications!
