A monopolistically competitive firm is inefficient because the firm:
A) earns positive economic profit in the long run.
B) is not producing at an output where marginal cost equals price.
C) is not maximising its profit.
D) produces an output where average total cost is at minimum.

Question

Quizplus · Accepted Answer

A monopolistically competitive firm faces a downward-sloping demand curve and has some market power, which allows it to charge a price higher than the marginal cost. Therefore, the firm will not produce at the output where marginal cost equals price, which leads to inefficiency in the form of producing less than socially optimal quantity. The other options are incorrect as a monopolistically competitive firm may earn zero economic profit in the long run due to the excess capacity and advertising costs and may maximize profit by producing where marginal revenue equals marginal cost instead of producing at the output where average total cost is at minimum.

A Monopolistically Competitive Firm Is Inefficient Because the Firm