What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?
What will be an ideal response?
Allocative efficiency refers to a state of the economy in which production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. Since perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of the last unit produced, allocative efficiency is achieved.
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When the Fed ________ securities in an open market operation, banks' reserves ________, and therefore lending ________
A) sells; increase; increases B) buys; increase; increases C) sells; decrease; increases D) buys; decrease; decreases E) buys; do not change; does not change
If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate
A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall.