In long-run equilibrium, monopolistic competition entails
A) an efficient allocation of resources.
B) an overallocation of resources due to inadequate capacity.
C) an underallocation of resources due to excess capacity.
D) production at the minimum attainable average total cost.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power and can charge prices higher than marginal cost in the short run. However, in the long run, new firms can enter the market and existing firms can exit, leading to excess capacity and an underallocation of resources. This means that firms are producing at a level below the minimum attainable average total cost, resulting in inefficiency. Therefore, choice C is the best answer.

In Long-Run Equilibrium, Monopolistic Competition Entails