A monopolistic competitive firm is inefficient because the firm:
A) earns positive economic profit in the long run.
B) is producing at an output corresponding to the condition that marginal cost equals price.
C) is not maximizing its profit.
D) produces an output where average total cost is not minimum.

Question

Quizplus · Accepted Answer

A monopolistic competitive firm is inefficient in the sense that it produces at a point where its average total cost is not minimum. This is because a monopolistic competitive firm produces at a point where its marginal revenue is less than its price, leading to a higher price and lower output than would be the case under perfect competition. As a result, the firm incurs a higher average total cost due to underutilization of its production capacity, resulting in inefficiency.

A Monopolistic Competitive Firm Is Inefficient Because the Firm