Question

Which of the following does not hold at the equilibrium price and quantity in a perfectly competitive market?

• A. Total surplus gets maximized
• B. Marginal benefit equals marginal cost
• C. Minimum willingness to pay equals minimum acceptable price
• D. All competitive equilibria are Pareto optimal

Hint:

In a perfectly competitive market, equilibrium is achieved when marginal benefit equals marginal cost, total surplus is maximized, and the equilibrium is Pareto optimal. However, the minimum willingness to pay does not necessarily equal the minimum acceptable price at equilibrium.

Answer 1

The Correct Option is C

In a perfectly competitive market, the equilibrium price and quantity are determined where the supply and demand curves intersect. At this point, the market is in a state of efficiency, and certain conditions hold: - (A) Total surplus gets maximized: This is correct. In a perfectly competitive market, total surplus (consumer surplus + producer surplus) is maximized because the market operates efficiently at equilibrium.
- (B) Marginal benefit equals marginal cost: This is correct. In a perfectly competitive market, the equilibrium is reached when marginal benefit (or demand) equals marginal cost (or supply).
- (C) Minimum willingness to pay equals minimum acceptable price: This is incorrect. At equilibrium, the minimum willingness to pay (which reflects consumer surplus) and the minimum acceptable price (reflecting producer surplus) do not necessarily equal each other. The consumer's willingness to pay is generally higher than the producer's minimum acceptable price, leading to a positive consumer surplus.
- (D) All competitive equilibria are Pareto optimal: This is correct. In perfect competition, every competitive equilibrium is Pareto optimal, meaning no one can be made better off without making someone else worse off.
The correct answer is (C), as minimum willingness to pay does not equal minimum acceptable price at equilibrium. Final Answer: (C) Minimum willingness to pay equals minimum acceptable price.