Question

Sort the following outcomes of product differentiation by whether they are costs or benefits of monopolistic competition. Items (5 items) (Drag and drop into the appropriate area below):

A) Prices set above the marginal costs of production - Benefit
B) Increased variety - Benefit
C) Long-run production at a point tangent to the average total cost (ATC) curve - Cost
D) Competition based on quality - Benefit
E) Competition based on location - Benefit

Answer 1

In monopolistic competition, prices set above the marginal cost represent a cost due to allocative inefficiency. Increased variety, along with competition based on quality and location, are benefits that provide consumers with choices and unique shopping experiences.

Step-by-step explanation:

When sorting the outcomes of product differentiation in monopolistic competition between costs or benefits, one must consider the specific effects they have on the market:

• A) Prices set above the marginal costs of production - This is typically seen as a cost to society since it indicates allocative inefficiency. Society loses the net benefit of potential additional units that are not produced because the price exceeds the marginal cost.
• B) Increased variety - This is a benefit of monopolistic competition, as consumers enjoy a wider range of options that cater to diverse preferences.
• C) Long-run production at a point tangent to the average total cost (ATC) curve - This signifies that firms are only able to break even in the long run, which can be considered a cost as firms are not achieving productive efficiency.
• D) Competition based on quality and E) Competition based on location - Both are benefits that arise from firms striving to differentiate themselves to attract customers beyond just competing on price.