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CMA Final · Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis

In the analysis of economic efficiency of a firm, 'allocative efficiency' is best described as:

Allocative efficiency means resources are distributed so that the output mix reflects what consumers value, which occurs where price equals marginal cost. Lowest-cost production describes productive efficiency, and technology-driven frontier shifts describe dynamic efficiency.

  1. AProducing a given output at the lowest possible cost of inputs
  2. BDistributing resources so that output mix matches what consumers value, with price equal to marginal costCorrect
  3. CUsing the latest technology to shift the production frontier outward
  4. DAchieving the largest possible output from a fixed plant size

Explanation

Allocative efficiency means resources are directed to the goods and services most valued by buyers, which occurs where price equals marginal cost. Producing at lowest cost is technical or productive efficiency, and outward shifts of the frontier relate to dynamic efficiency.

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