Figure 12.1.2
-Refer to Figure 12.1.2 above. Which of the following best describes the reason for the shaded triangle in panel (b)?
A) The triangle shows the benefits of advertising and product differentiation, which do not exist in perfect competition.
B) The triangle describes the improvement in efficiency in monopolistic competition.
C) The triangle describes the deadweight loss associated with market power in monopolistic competition.
D) The gains in allocative efficiency under monopolistic competition, compared to a perfectly competitive market.

Question

Figure 12.1.2
-Refer to Figure 12.1.2 above. Which of the following best describes the reason for the shaded triangle in panel (b)?
A) The triangle shows the benefits of advertising and product differentiation, which do not exist in perfect competition. 
B) The triangle describes the improvement in efficiency in monopolistic competition. 
C) The triangle describes the deadweight loss associated with market power in monopolistic competition. 
D) The gains in allocative efficiency under monopolistic competition, compared to a perfectly competitive market.

Quizplus · Accepted Answer

The shaded triangle represents the deadweight loss associated with market power in monopolistic competition. This is because monopolistically competitive firms have some degree of market power, which allows them to charge higher prices and produce less output than would occur in a perfectly competitive market, resulting in a loss of allocative efficiency. The triangle represents the welfare loss to consumers and producers that arises from this inefficiency.

Figure 12.1.2 -Refer to Figure 12.1.2 Above. Which of the Following Best