Question

Which of the following does not hold at the equilibrium price and quantity in a perfectly competitive market?

• A. Total surplus gets maximised
• B. Marginal benefit equals marginal cost
• C. Minimum willingness to pay equals minimum acceptable price
• D. All competitive equilibria are Pareto optimal

Hint:

In a perfectly competitive market, the equilibrium maximizes total surplus, but not all competitive equilibria are Pareto optimal.

Answer 1

The Correct Option is D

Step 1: Understanding perfect competition.
In a perfectly competitive market, at equilibrium, total surplus is maximized, marginal benefit equals marginal cost, and minimum willingness to pay equals minimum acceptable price.

Step 2: Analysis of options.
- (A) Total surplus gets maximised: This is correct. At equilibrium, total surplus (consumer + producer surplus) is maximized.
- (B) Marginal benefit equals marginal cost: This is correct. At equilibrium, the price equals both marginal benefit and marginal cost.
- (C) Minimum willingness to pay equals minimum acceptable price: This is correct. At equilibrium, these values are equal, ensuring no surplus or shortage.
- (D) All competitive equilibria are Pareto optimal: This is incorrect. Not all competitive equilibria are Pareto optimal, especially when there are externalities or imperfect information.

Step 3: Conclusion.
The incorrect statement is (D), as not all competitive equilibria are Pareto optimal.