A monopolistically competitive firm misallocates resources because:
A) the firm is not maximising its profit.
B) the firm is producing too little output at inflated prices.
C) the firm earns positive economic profit in the long run.
D) the firm passes the standard efficiency test.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power and can set their own prices. However, they also face competition from similar products, so they cannot raise prices too high without losing customers. As a result, they may choose to produce less output than is socially efficient (i.e. the level of output that would maximize total welfare in the economy) in order to maintain their market power and charge higher prices. This leads to a misallocation of resources, as some consumers who would be willing to pay the production cost plus a reasonable profit for the additional units of output are unable to purchase them at the monopolistically high prices.

A Monopolistically Competitive Firm Misallocates Resources Because