Resources should be allocated where MB equals MC.

Resources should be allocated where MB equals MC.

• A. Where marginal benefit equals marginal cost
• B. Where marginal cost exceeds marginal benefit
• C. Where marginal benefit exceeds marginal cost
• D. Where total benefit is maximized

Answer: (A)

The idea is allocative efficiency: produce up to the point where the benefit of the next unit to society just covers its cost. In practical terms, the last unit produced should add as much value as it costs. If the marginal benefit of producing one more unit is higher than its marginal cost, increasing output raises net benefits, so you should produce more. If the marginal cost is higher than the marginal benefit, producing more would waste resources, so you should produce less. When MB equals MC, the net benefit from the next unit is zero, so resources are allocated in the most efficient way. That’s why the correct condition is where marginal benefit equals marginal cost. The idea that total benefit is maximized is related, but the precise, incremental rule used in allocating resources is MB = MC.

The idea is allocative efficiency: produce up to the point where the benefit of the next unit to society just covers its cost. In practical terms, the last unit produced should add as much value as it costs. If the marginal benefit of producing one more unit is higher than its marginal cost, increasing output raises net benefits, so you should produce more. If the marginal cost is higher than the marginal benefit, producing more would waste resources, so you should produce less. When MB equals MC, the net benefit from the next unit is zero, so resources are allocated in the most efficient way. That’s why the correct condition is where marginal benefit equals marginal cost. The idea that total benefit is maximized is related, but the precise, incremental rule used in allocating resources is MB = MC.