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: Perfect Competition Principles. In a perfectly competitive market, equilibrium is characterized by the maximization of total surplus, the equality of marginal benefit and marginal cost, and the equivalence of minimum willingness to pay with the minimum acceptable price.

Step 2: Option Evaluation. - (A) Total surplus maximization: Correct. Equilibrium in this market maximizes the combined consumer and producer surplus. - (B) Marginal benefit equals marginal cost: Correct. At equilibrium, the market price reflects both marginal benefit and marginal cost. - (C) Minimum willingness to pay equals minimum acceptable price: Correct. This equality at equilibrium prevents surpluses or shortages. - (D) All competitive equilibria are Pareto optimal: Incorrect. Competitive equilibria may not achieve Pareto optimality when externalities or information asymmetries are present.

Step 3: Final Determination. Statement (D) is erroneous because not all competitive equilibria satisfy the conditions for Pareto optimality.