Allocative efficiency on a monopolistic graph occurs at the output level where which condition holds?

• A. P equals MC
• B. MC hits Demand
• C. MR equals MC
• D. P equals ATC

Answer: (B)

Allocative efficiency means producing the exact quantity where the value to consumers from one more unit (the price they’re willing to pay) equals the marginal cost of producing that unit. On a monopolist’s graph, the value to consumers is represented by the demand (price) curve, and the corresponding marginal cost is the MC curve. The efficient output is where MC equals the price on the demand curve—where MC intersects the demand curve. At that point, P = MC.

In a monopoly, the firm instead sets output where MR = MC to maximize profit, which typically gives P > MC and creates deadweight loss. So the condition that captures allocative efficiency is MC equaling the price consumers are willing to pay (the demand curve).