Resources are efficiently allocated when production occurs where:
a. marginal cost equals average variable cost.
b. price is equal to average revenue.
c. price is equal to marginal cost.
d. price is equal to average variable cost.
The correct answer and explanation is :
The correct answer is c. price is equal to marginal cost.
Explanation:
In economics, efficient resource allocation in production is achieved when the marginal cost (MC) of producing one more unit of a good or service equals the price (P) consumers are willing to pay for that good or service. This condition is crucial for ensuring that resources are used in the most efficient way possible, where the benefit to society (in terms of consumer satisfaction) from producing one more unit of a good equals the cost incurred in producing that unit.
Let’s break this down further:
- Marginal Cost (MC): This is the additional cost incurred from producing one more unit of a good or service. It’s the cost of producing the last unit in a production process.
- Price (P): This refers to the amount consumers are willing to pay for the good or service. In perfect competition, price equals marginal revenue (MR), which is the additional revenue a firm receives from selling one more unit.
The condition P = MC represents allocative efficiency, a situation in which the value placed by consumers on the last unit of a good (reflected by the price they are willing to pay) is exactly equal to the cost of producing that unit (MC). When P = MC, it means that the resources used in production are being put to their best use, and society is not over-producing or under-producing a good.
Why not the other options?
- a. MC = AVC: This is not the condition for efficiency. While marginal cost may be equal to average variable cost in certain circumstances, this does not imply that resources are efficiently allocated in the market.
- b. P = AR: In perfectly competitive markets, this is always true, but it doesn’t necessarily indicate allocative efficiency.
- d. P = AVC: This is the break-even point for firms in the short run. If price equals average variable cost, the firm is covering its variable costs but not necessarily achieving efficient resource allocation in the broader economic sense.
Therefore, P = MC is the condition for achieving allocative efficiency in production.