The efficiency of monopolistic competition
A) is as clear-cut as the efficiency of perfect competition.
B) depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity.
C) comes from its excess capacity.
D) is eliminated in the long run.
E) is equal to that of monopoly.

Question

Quizplus · Accepted Answer

The efficiency of monopolistic competition depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity. In the short run, monopolistically competitive firms may earn profits, but in the long run, new firms will enter the market, which can eliminate economic profits and increase consumer surplus. However, firms still tend to have excess capacity compared to perfect competition, which can be viewed as inefficient. So, while monopolistic competition may offer some benefits in terms of product variety, its overall efficiency depends on the trade-off between these benefits and its costs.

The Efficiency of Monopolistic Competition