Refer to Table 10-1. In a competitive market, what is the socially optimal quantity of output?

• A. The quantity where total revenue is maximized
• B. The quantity where average total cost equals price
• C. The quantity where marginal cost equals average revenue
• D. The quantity where marginal social benefit equals marginal social cost

Answer: (D)

Verified step by step guidance

1. Understand the concept of social optimality in a competitive market: The socially optimal quantity of output is where the marginal social benefit (MSB) equals the marginal social cost (MSC). This ensures that the allocation of resources maximizes overall social welfare.
2. Recall that in a perfectly competitive market, the price (P) equals the marginal revenue (MR) and also equals the average revenue (AR). Therefore, the marginal social benefit can be represented by the price or average revenue.
3. Identify that the marginal social cost corresponds to the marginal cost (MC) of producing the good, as it reflects the additional cost to society of producing one more unit.
4. Set up the equality for social optimality: \$ MSB = MSC \$ which translates to \$ P = MC \$ in a competitive market context.
5. Use the data from Table 10-1 to find the quantity where the marginal cost equals the price (or average revenue), which will give you the socially optimal quantity of output.