When does allocative efficiency occur?

Answer explanation

Allocative efficiency occurs when resources are distributed in a way that maximizes total societal welfare, meaning that the price of a good reflects the marginal cost of producing it, leading to optimal production and consumption.

What is the condition for allocative efficiency?

Answer explanation

The condition for allocative efficiency is when price (P) equals marginal cost (MC). This means resources are allocated in a way that maximizes total welfare, as consumers pay exactly what it costs to produce the last unit.

Explain why a monopoly firm can continue making economic profit in the long run?

Answer explanation

A monopoly firm can maintain long-run economic profit due to high barriers to entry, preventing competitors from entering the market and driving prices down, allowing the monopolist to set prices above marginal cost.

Which of these is an example of a barrier to entry?

• 1. Financial barriers 

• Accounting barriers

• 1. Business barriers

• Regulatory barriers

Answer explanation

Financial barriers and regulatory barriers are examples of barriers to entry, as they can prevent new competitors from entering a market due to high costs or strict regulations.

What is the profit maximization rule ?

Answer explanation

The profit maximization rule states that a firm should continue to produce output until the marginal cost of producing an additional unit equals the marginal revenue gained from that unit. This ensures maximum profit.

What is the Economic profit formula?

• Profit = revenue - (implicit costs + explicit costs)

• Profit = income - expenses

• Profit = implicit costs - explicit costs + revenue

Answer explanation

The correct formula for economic profit is Profit = revenue - (implicit costs + explicit costs). This accounts for both the explicit costs (direct expenses) and implicit costs (opportunity costs) to determine true profitability.

Where does productive efficiency occur?

• P = MC

• AR = AC

• MR = MC

• Lowest AC

Answer explanation

Productive efficiency occurs at the lowest average cost (AC), where a firm produces goods at the minimum cost per unit. This is the point where resources are utilized most effectively.

Monopolies are price

Answer explanation

Monopolies are price makers because they have significant control over the market and can set prices above marginal cost, unlike in competitive markets where prices are determined by supply and demand.

Which of the following characteristics is typical of an oligopoly market?

• 1. Many small sellers with no market power

• 1. Low barriers to entry and perfect competition

• 1. A few large sellers with mutual interdependence

• Firms that are price takers and cannot influence the market

Answer explanation

An oligopoly is characterized by a few large sellers who are mutually interdependent, meaning the actions of one firm can significantly impact the others. This distinguishes it from markets with many small sellers or perfect competition.

What does the lowest point on an average cost curve represent?

Answer explanation

The lowest point on an average cost curve represents productive efficiency, where the firm produces at the lowest possible cost per unit. This is the optimal output level, minimizing average costs.