Perfect competition achieves allocative efficiency because the market price is:

• A. greater than average total cost
• B. equal to average variable cost
• C. equal to marginal cost
• D. less than marginal revenue

Answer: (C)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when resources are distributed in a way that maximizes total societal welfare, meaning the quantity of goods produced matches consumer preferences.
2. Recall that in perfect competition, firms are price takers, so the market price (P) is equal to the marginal revenue (MR) for each firm.
3. Recognize that allocative efficiency requires that the price consumers pay equals the marginal cost (MC) of producing the good, because this ensures that the value consumers place on the last unit produced matches the cost of resources used to produce it.
4. Compare the given options: 'greater than average total cost' relates to profitability, 'equal to average variable cost' relates to shutdown decisions, and 'less than marginal revenue' contradicts the perfect competition condition where P = MR.
5. Conclude that the correct condition for allocative efficiency in perfect competition is when the market price equals marginal cost, i.e., \(P = MC\).