In monopolistic competition there is an underallocation of resources at the profit-maximizing level of output, which means that

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In monopolistic competition, firms have some power to set prices above marginal costs (MC) due to product differentiation. This leads to a situation where the price charged by firms is greater than the marginal cost of production, indicating an underallocation of resources since not all consumers who value the product at its marginal cost or higher are able to purchase it at the profit-maximizing output level.

In Monopolistic Competition There Is an Underallocation of Resources at the Profit-Maximizing