Explain how the free-market mechanism adjusts prices so that resource allocation is economically efficient
Firms are induced to buy and use inputs so that they yield the most-valuable outputs per unit of input. Prices are the rationing agents in their decision making. In distribution, the pricing mechanism serves to allocate products among consumers in ways that match individual preferences as they seek to maximize utility. Firms are induced to set MC equal to price, and consumers are induced to set MU equal to price, thus guaranteeing that the rule for efficiency, MC = MU, is satisfied.
You might also like to view...
If a firm in the long run produces less than its efficient scale, it
A) should raise its markup to increase its profit. B) should lower its markup to increase its profit. C) cannot be a perfectly competitive firm. D) should not advertise to increase its profit. E) must have its markup equal to zero.
The optimal level of air quality
a. is 100 percent, which creates a pollution-free environment b. is smaller the lower the marginal social cost of air quality c. is greater the lower the marginal social benefit of air quality d. is greater the lower the marginal social cost of air quality e. is smaller the greater the marginal social benefit of air quality