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In the wholesale flower market example, suppose firms produce a smaller quantity than the allocatively efficient level, so that price exceeds marginal cost. According to the source, what does this imply for society?
AThe social benefit of more flowers exceeds the social cost
BThe social benefit of more flowers is less than the cost
CSociety should produce even fewer flowers than this
DPrice and marginal cost can never differ here
Answer & Solution
Correct answer: A. The social benefit of more flowers exceeds the social cost
1. Price measures what consumers are willing to pay for one more flower, which stands in for the social benefit of that unit.
2. Marginal cost measures the cost of the inputs needed to produce one more flower, standing in for the social cost.
3. If price is above marginal cost, the social benefit of producing more exceeds the social cost, meaning society gains from producing additional units.
4. That is the opposite of a signal to cut production further, ruling out the option that recommends producing even less.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 8 "Perfect Competition", section 8.4 | Efficiency in Perfectly Competitive Markets_
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