Monopolistic competition is inefficient because:
A) firms earn positive economic profits.
B) the firms' marginal costs and marginal revenues are not equal.
C) firms have excess capacity in the long run.
D) entry is difficult.

Question

Quizplus · Accepted Answer

Monopolistic competition is inefficient because firms have excess capacity in the long run. This means that firms are not producing at the minimum average total cost, leading to a waste of resources and higher prices for consumers. While firms may earn positive economic profits, this does not necessarily make the market inefficient. The fact that firms' marginal costs and marginal revenues are not equal is a characteristic of monopolistic competition, but not necessarily an inefficiency. Entry may be difficult in the short run, but in the long run new firms can enter and compete with existing firms, reducing any inefficiencies.

Monopolistic Competition Is Inefficient Because