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X-inefficiency refers to the situation in which A
X-inefficiency refers to the situation in which
A. firms that use labor-intensive production methods tend to be less efficient than firms that use capital-intensive production methods.
B. firms with market power have less incentive to minimize their costs of production than more competitive firms.
C. highly competitive firms have less incentive to minimize their costs of production than other firms because the highly competitive firms have almost no chance to earn above-average profits.
D. firms are unable to minimize their costs of production because there is no potential for input substitution.
Expert Solution
- The correct option is B. Firms with market power have less incentive to minimize their costs of production than more competitive firms.
Here, it is stated that X is an inefficient input in the production process. Therefore, it can be inferred the firm can raise their production and reduce its production cost by efficiently using X. But, the firm that has market power rarely consider cost minimization as they can earn high profit by charging a higher price. Thus, it can be stated that firms with market power are less incentivized than competitive firms in optimally using X-input.
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