What condition may provide for a relatively small degree of inefficiency under monopolistic competition?
A) There is a single seller and no product differentiation.
B) The marginal cost of production is less than the market price.
C) The demand curve is relatively elastic so that the price is near the long-run minimum average cost.
D) There is only one buyer in the market.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power due to product differentiation. If demand for the firm's product is relatively elastic, the firm will need to keep prices close to the long-run minimum average cost in order to avoid losing customers to competitors. This provides an incentive for the firm to operate relatively efficiently, minimizing inefficiencies. Choices A, B, and D are incorrect because they do not describe conditions that would lead to a small degree of inefficiency under monopolistic competition.

What Condition May Provide for a Relatively Small Degree of Inefficiency