Question

In the context of a perfectly competitive market, identify the statement that is NOT CORRECT.

• A. Producing less than the competitive output lowers welfare.
• B. Producing more than the competitive output lowers welfare.
• C. The welfare is dependent on both price and the competitive output.
• D. If a consumer values the last unit more than its marginal cost of production, producing an additional unit shall lower welfare.

Hint:

In a perfectly competitive market, the equilibrium is achieved when the price equals marginal cost, and the output is socially optimal. Any deviation from this results in welfare loss.

Answer 1

The Correct Option is D

Step 1: Understanding perfectly competitive market characteristics.

In a perfectly competitive market, the price is equal to the marginal cost at the competitive output level.
Producing less than the competitive output results in underproduction, which lowers welfare (Option A).
Producing more than the competitive output leads to overproduction, causing inefficiency and a reduction in welfare (Option B).
Welfare in a competitive market is dependent on both price and competitive output levels (Option C).

Step 2: Analyze Option D.

If a consumer values the last unit more than its marginal cost, producing that additional unit increases welfare. Therefore, producing more when the consumer values the last unit more than the marginal cost will not lower welfare.