The oligopolistic industry is not allocatively efficient because:

• A. firms always produce at the lowest possible average cost
• B. there is perfect competition among firms
• C. firms set prices above marginal cost, resulting in underproduction relative to the socially optimal level
• D. resources are distributed equally among all consumers

Answer: (C)

Verified step by step guidance

1. Understand the concept of allocative efficiency: it occurs when the price of a good equals the marginal cost of production, meaning resources are allocated to produce the quantity most desired by society.
2. Recognize that in an oligopolistic market, firms have some market power, allowing them to set prices above marginal cost rather than taking the price as given (unlike perfect competition).
3. Recall that when price exceeds marginal cost, the quantity produced is less than the socially optimal level, leading to underproduction and a deadweight loss.
4. Note that producing at the lowest possible average cost relates to productive efficiency, which is different from allocative efficiency; oligopolies may or may not produce at lowest average cost.
5. Conclude that the key reason oligopolies are not allocatively efficient is because firms set prices above marginal cost, causing underproduction relative to the socially optimal output.