# 1. (1 point) Why does producing where P = MC indicate allocative e...

## Question

1. (1 point) Why does producing where P = MC indicate allocative efficiency?
2. (1 point) Why does producing at the minimum of ATC indicate productive efficiency?
3. (2 points) Using the notion of total surplus, explain why perfectly competitive firms are efficient by monopolies are not. Be sure to draw graphs to explain your answer.

What is the main conclusion of the article? What evidence was supplied to support that conclusion? If true, what is the implication of the conclusion for public policy and economic well-being? Lastly, do you believe the conclusion is, indeed, true? Why or why not? Please note that this question is worth half of your assignment grade.

## Solution Preview

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1. (1 point) Why does producing where P = MC indicate allocative efficiency?

The equation: P = MC implies that the additional cost from producing one more unit of product is equal to the price the firm receives. If P > MC, producing one more unit of products costs less than the revenue received from selling it assuming that the marginal cost is increasing in the production level. If P < MC, then producing one more unit of products costs more than it pays. For a profit maximizing firm, you will be producing the amount of products at P = MC(Q) after all.

The firm is producing the largest amount possible without sacrificing the potential gain by taking some production back, which makes as much as product possible available in the market at the lowest possible price. Therefore, the equation indicates allocative efficiency....

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