The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
-Refer to Figure 11- 3.A monopolistically competitive firm is said to be inefficient because in the long- run equilibrium

Question

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Refer to Figure 11- 3.A monopolistically competitive firm is said to be inefficient because in the long- run equilibrium

Quizplus · Accepted Answer

In monopolistically competitive markets, firms have some market power and can charge prices above marginal cost (MC). However, in the long-run, new firms can enter the market and offer similar products, eroding the market power of existing firms. In the long-run equilibrium, firms will produce at a level where price equals average total cost (LRAC) but this level of production may not be at the minimum point of the LRAC curve. This means that resources are not being allocated efficiently, as it is possible to produce the same quantity of output at a lower cost. Therefore, the best choice is C.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically