a.) Perfect competition is used to evaluate allocative efficiency in market structure. This may be considered unrealistic, but the characteristics of perfect competition nevertheless ensure efficiency. Demonstrating that perfection is in fact the main objective of perfect competition allows us to assess the physical structure of the global market which certainly falls short of this perfection and to illustrate the best of all possible worlds in terms of allocation of resources. With perfect competition, efficiency is achieved because price equals marginal cost. The value of the goods produced is indicated by the price and therefore production generates satisfaction. The opportunity cost of unproduced goods is indicated by marginal cost and therefore results from the loss of satisfaction due to forgone production. Overall satisfaction cannot be added by decreasing or increasing production because the price (satisfaction obtained) equals the marginal cost (satisfaction given up). If there is no equality between price and marginal cost, then we can increase satisfaction by changing output. Allocative efficiency: when the quantity of output produced achieves the greatest possible level of total welfare. When MB=MC. When P = MC.B.) Firms in monopolistic competition fail to achieve allocative efficiency because price is greater than marginal cost. One of the reasons for its inefficiency is also that it charges higher prices and produces less output than perfect competition. As the chart shows, all businesses want to make maximum profit. Allocative efficiency is the best point, where marginal cost equals marginal revenue (Q3). All firms will like to have maximum profits where marginal cost equals marginal revenue (Q1). ...... middle of document ...... proportional change in demand divided by proportional change in income) Elastic because the value is greater than 1. Complementary good because demand for the good decreases as the price of the good other good increases.Answer 9 (a) the firm will produce 70 units in order to maximize profits at a price of $8 per unit. (b) The firm's average cost of production will be $6 at output. (c) The company makes 2*$70 = $140 profit. (d) The firm will produce 50 units to maximize its profit at a price of $5 per unit. (e) She will make $0 profit. (f) The firm will produce 40 units to maximize profits at a price of $4 per unit. (g) The company will incur a loss of $1.50 * 40 = $60. (h) The firm will close below the price of $3.50 (where P = AVC). (i) Will close below the price of $5 (where P=AC) in the long run.