The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
FIGURE 11- 1
-An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry,because imperfect competitors

Question

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
  FIGURE 11- 1
-An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry,because imperfect competitors

Quizplus · Accepted Answer

Imperfectly competitive firms, including monopolistically competitive firms, are able to set prices above marginal cost, leading to a lower level of output and higher prices than what would be seen in a perfectly competitive market. This results in allocative inefficiency, as the industry is not producing at the point where marginal benefit equals marginal cost. The fact that imperfectly competitive firms are able to make profits is a result of this pricing behavior. While imperfectly competitive firms may also operate in the global economy and obtain economies of scale, these factors are not directly related to the issue of allocative efficiency. Ultimately, the key characteristic that leads to allocative inefficiency in imperfectly competitive markets is the ability to set prices above marginal cost.

The Diagram Below Shows Selected Cost and Revenue Curves for a Firm