In a competitive market, capital allocation is efficient when it causes price to
A)equal marginal cost.
B)equal average variable cost.
C)be greater than marginal cost.
D)be greater than average variable cost.
E)be greater than average total cost.

Question

Quizplus · Accepted Answer

In a competitive market, firms will produce at the point where price equals marginal cost because if they produce at a lower quantity where price is greater than marginal cost, they could increase profits by producing more. Conversely, if they produce at a higher quantity where price is less than marginal cost, they are losing money on each additional unit produced. Therefore, capital allocation is efficient when price equals marginal cost.

In a Competitive Market, Capital Allocation Is Efficient When It