Question

Which of the following best describes the efficiency of monopolistically competitive firms?

1) Both allocatively efficient and productively efficient.
2) Allocatively efficient but productively inefficient.
3) Allocatively inefficient but productively efficient.
4) Neither allocatively efficient nor productively efficient.

Answer 1

Monopolistically competitive firms are neither allocatively efficient nor productively efficient, as they do not produce at the minimum cost or where price equals marginal cost.

Step-by-step explanation:

The question 'Which of the following best describes the efficiency of monopolistically competitive firms?' pertains to the nature of monopolistic competition in economics. The correct answer is that monopolistically competitive firms are neither allocatively efficient nor productively efficient.

Monopolistically competitive firms do not produce at the minimum of their average cost curve, meaning they are not productively efficient. Furthermore, they do not produce where price equals marginal cost (P = MC), which is the condition for allocative efficiency. Instead, they produce at a level where price is greater than marginal cost (P > MC), resulting in a higher price and lower output than would occur in a perfectly competitive market.