Question

Compared with firms in competition, firms in monopolistic competition in the long run:

a. produce more and sell at a lower price.
b. achieve allocative efficiency.
c. produce less and sell at a higher price.
d. produce less and sell at a lower price.

Answer 1

The correct answer is C. Firms in monopolistic competition produce less and sell at higher prices compared to perfectly competitive firms, resulting in neither productive nor allocative efficiency in the long run.

Step-by-step explanation:

In the long run, compared to firms in competition, firms in monopolistic competition produce less and sell at a higher price. Monopolistic competition is a market structure characterized by firms with differentiated products and some degree of market power. Since firms in monopolistic competition have some control over the price they charge, they can set a higher price and produce a lower quantity of goods to maximize their profits.

Compared with firms in a perfectly competitive market, firms in monopolistic competition in the long run produce less and sell at a higher price. Unlike perfect competition, where firms produce at the lowest point on the average cost curve, firms in monopolistic competition do not achieve this level of productive efficiency. Instead, they operate on the downward-sloping portion of the average cost curve. Additionally, because they set their price higher than marginal cost (P > MC), they do not achieve allocative efficiency, which implies producing where the price equals the marginal cost. Therefore, resources are not allocated in the most socially beneficial way in monopolistic competition, leading to higher prices and less production compared to perfect competition.