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 allocatively 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 allocatively inefficient because in the long- run equilibrium

Quizplus · Accepted Answer

In the long-run equilibrium, a monopolistically competitive firm produces at a point where price is greater than MC (marginal cost) and produces at a quantity where LRAC (long-run average cost) is not at its minimum. This means that the resources could be better allocated if the firm produced at a lower quantity where price is equal to MC and LRAC is at its minimum. Therefore, the firm is considered allocatively inefficient. Choice B accurately describes this situation.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically