Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?
A)In contrast to perfectly competitive markets, neither allocative efficiency nor productive efficiency are achieved in monopolistically competitive markets.
B)In contrast to perfectly competitive markets, firms in monopolistically competitive markets earn economic profits in long-run equilibrium.
C)In contrast to perfectly competitive markets, firms in monopolistically competitive markets do not produce where price equals average total cost in long-run equilibrium.
D)In contrast to perfectly competitive markets, firms in monopolistically competitive markets can charge a price greater than average total cost in the short run.

Question

Quizplus · Accepted Answer

Monopolistically competitive markets are less efficient than perfectly competitive markets because neither allocative efficiency nor productive efficiency are achieved. Allocative efficiency, achieved in perfectly competitive markets, means that resources are allocated to produce the goods and services most valued by consumers. In monopolistically competitive markets, however, firms have some market power and can charge a price greater than marginal cost, resulting in a loss of allocative efficiency. Productive efficiency, achieved when firms produce at the lowest point on the average total cost curve, is not necessarily achieved in monopolistically competitive markets either. Therefore, monopolistically competitive markets are less efficient than perfectly competitive markets. B, C, and D are not the best choice because they do not fully capture the inefficiency of monopolistically competitive markets compared to perfectly competitive markets.

Economists Have Long Debated Whether There Is a Significant Loss