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 productively 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 productively inefficient because in the long- run equilibrium

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power and can charge a price above their marginal cost in the short run. However, in the long run, new firms can enter the market, leading to increased competition and lower profits for existing firms. In the long-run equilibrium, firms in monopolistic competition produce at a level where price equals long-run average cost (LRAC) but LRAC is not at its minimum point. Therefore, the firm is not productively efficient because it is not producing at the lowest possible cost. Option E correctly describes this situation. Options A, B, C, and D are not true for monopolistically competitive firms.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically