Chapter 14: Problem 7

The disposable diaper industry is perfectly competitive. Which of the following is true? a. since the industry is perfectly competitive, price and quantity are at the socially efficient levels. b. Competitive price is higher and competitive quantity lower than the socially efficient point. c. Competitive price is higher and competitive quantity higher than the socially efficient point. d. Competitive price is lower and competitive quantity higher than the socially efficient point.

Short Answer

Expert verified

In a perfectly competitive market, price and quantity are at the socially efficient levels, as the market price is equal to the marginal cost (P = MC), and the socially efficient point occurs when MC = P (MB). Thus, the correct answer is: a. since the industry is perfectly competitive, price and quantity are at the socially efficient levels.

Step by step solution

Understanding a Perfectly Competitive Market

A perfectly competitive market is characterized by the following: 1. Numerous sellers and buyers. 2. No barriers to entry or exit. 3. Homogenous products. 4. Perfect information among consumers and producers. In a perfectly competitive market, each firm is said to be a price taker. This means that the market price is given, and they have no control over their prices. The firms will produce up to the point where their marginal cost is equal to the market price because it is the most optimal production level.

Determining Socially Efficient Levels

A socially efficient outcome is achieved when the marginal cost (MC) equals the marginal benefit (MB). In a perfectly competitive market, the marginal benefit is represented by the market price (P), since consumers' willingness to pay directly reflects the value of the good for them. Socially efficient point occurs when MC = P (MB). Now, let's analyze each option:

Option A

"Since the industry is perfectly competitive, price and quantity are at the socially efficient levels." In a perfectly competitive market, the market price is equal to the marginal cost (P = MC). As we determined before, the socially efficient point is where MC = MB (P). Therefore, in a perfectly competitive market, price and quantity are at socially efficient levels. This statement is true.

Option B

"Competitive price is higher and competitive quantity lower than the socially efficient point." In a perfectly competitive market, the market price is equal to the socially efficient price (MC = P). Therefore, the competitive price can't be higher than the socially efficient point. The statement is false.

Option C

"Competitive price is higher and competitive quantity higher than the socially efficient point." As explained earlier, in a perfectly competitive market, the market price is equal to the socially efficient price (MC = P). The competitive price can't be higher. The statement is false.

Option D

"Competitive price is lower and competitive quantity higher than the socially efficient point." In a perfectly competitive market, the market price is equal to the socially efficient price (MC = P). Therefore, the competitive price can't be lower and the quantity higher than the socially efficient point. The statement is false. Based on the analysis of each option, the correct answer is: a. since the industry is perfectly competitive, price and quantity are at the socially efficient levels.