In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?
A)Firms in perfect competition achieve productive and allocative efficiency while firms in monopolistic competition achieve neither allocative nor productive efficiency.
B)The only difference is that in a monopolistically competitive market there are many brands to choose from while in a perfectly competitive market there is one standard product.
C)Firms in perfect competition achieve productive efficiency while firms in monopolistic competition achieve allocative efficiency.
D)Firms in perfect competition achieve allocative efficiency while firms in monopolistic competition achieve brand efficiency.

Question

Quizplus · Accepted Answer

Long-run equilibrium under monopolistic competition differs from long-run equilibrium under perfect competition in that firms in perfect competition achieve both productive and allocative efficiency, while firms in monopolistic competition achieve neither. In monopolistic competition, firms have some degree of market power due to differentiation of their products, which leads to excess capacity and higher prices than a perfectly competitive market. Therefore, monopolistic competition leads to allocative inefficiency, and the presence of excess capacity indicates a lack of productive efficiency.

In What Way Does Long-Run Equilibrium Under Monopolistic Competition Differ