A monopolistically competitive firm is a resource misallocator because:

Question

Quizplus · Accepted Answer

A monopolistically competitive firm has some market power and can set prices above marginal cost, leading to underallocation of resources. The firm also tends to produce less output than the socially optimal level, resulting in deadweight loss. Therefore, a monopolistically competitive firm is a resource misallocator. The other options are incorrect as a firm may not always aim to maximize profit or earn positive economic profit in the long run. Additionally, passing the standard efficiency test does not necessarily indicate efficient resource allocation.

A Monopolistically Competitive Firm Is a Resource Misallocator Because