In a perfectly competitive market, which of the following is considered the most efficient method of production?

• A. Producing at the point where average total cost is minimized
• B. Producing at the point where marginal cost equals average variable cost
• C. Producing at the point where total revenue is maximized
• D. Producing at the point where marginal cost equals marginal revenue

Answer: (D)

Verified step by step guidance

1. Understand the concept of productive efficiency in a perfectly competitive market, which occurs when firms produce at the lowest possible cost per unit, typically where average total cost (ATC) is minimized.
2. Recall that allocative efficiency occurs when the price (P) equals marginal cost (MC), meaning resources are allocated to produce the goods most desired by consumers.
3. Recognize that in perfect competition, firms maximize profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR), and since price equals MR, this is also where P = MC.
4. Note that producing where MC = MR ensures that the firm is not producing too much or too little, which aligns with allocative efficiency rather than just minimizing average total cost or maximizing total revenue.
5. Conclude that the most efficient method of production in a perfectly competitive market is producing at the point where marginal cost equals marginal revenue, as this balances cost and revenue optimally.