Although firms earn zero profits in the long run, why is the outcome from monopolistic competition considered to be inefficient?
A) Price exceeds marginal cost.
B) Quantity is lower than the perfectly competitive outcome.
C) Goods are not identical.
D) A and B are correct.
E) B and C are correct.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some market power, allowing them to set prices above marginal cost, which leads to inefficiency. Additionally, the quantity produced and sold is lower than in a perfectly competitive market, where price equals marginal cost. This combination of price exceeding marginal cost and reduced quantity compared to perfect competition leads to inefficiency, making both A and B correct.

Although Firms Earn Zero Profits in the Long Run, Why