Question

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

• A. Total surplus gets maximized
• 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, equilibrium is achieved when marginal benefit equals marginal cost, total surplus is maximized, and the equilibrium is Pareto optimal. However, the minimum willingness to pay does not necessarily equal the minimum acceptable price at equilibrium.

Answer 1

The Correct Option is C

Topic: Efficiency of Perfect Competition
Understanding the Question: Identify which of the statements is NOT true for a perfectly competitive market equilibrium.
Key Formulas and Approach: Equilibrium occurs where Supply (MC) = Demand (MB).
Detailed Solution:
Step 1: Analyze Efficiency. In perfect competition, Price = MC. Since Demand represents Marginal Benefit (MB), MB = MC. This maximizes Total Surplus. Thus, (A) and (B) are true.
Step 2: Analyze Pareto Optimality. The First Welfare Theorem states that every competitive equilibrium is Pareto optimal. Thus, (D) is true.
Step 3: Analyze "Willingness to Pay". At equilibrium, the Marginal willingness to pay equals the Marginal cost. However, "Minimum willingness to pay" and "Minimum acceptable price" refer to the very first unit or the tails of the curves, which are not equal.
Conclusion: Option (C) is the incorrect statement.