Economics · Welfare Economics and Invisible Hand
Given below are two statements: Assertion (A): The First Fundamental Theorem of Welfare Economics establishes that any competitive equilibrium is Pareto efficient, assuming complete markets, no externalities, and no public goods - providing a formal justification for Adam Smith's 'invisible hand' argument. Reason (R): In a competitive equilibrium, every consumer's MRS equals the price ratio (Px/Py), and every producer's MRT (through the price line) also equals this ratio, ensuring the Pareto condition MRS = MRT is satisfied across all consumers and producers. Choose the most appropriate answer:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1(A) is false, but (R) is true
- 2(A) is true, but (R) is false
- 3Both (A) and (R) are true, but (R) is NOT the correct explanation of (A)
- 4Both (A) and (R) are true, and (R) is the correct explanation of (A)✓
Correct answer
Both (A) and (R) are true, and (R) is the correct explanation of (A)
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