Question

If one were to compare the monopolistically competitive firm's long run outcome to that of a perfectly competitive one, one would conclude that the monopolistically competitive firm:

a. creates more total surplus.
b. produces less.
c. charges less.
d. earns greater profits.

Answer 1

A monopolistically competitive firm produces less and charges a higher price in the long run compared to a perfectly competitive firm, leading to allocative inefficiency and resulting in zero economic profits due to market entry and exit responses.

Step-by-step explanation:

When comparing the long-run outcomes of a monopolistically competitive firm to that of a perfectly competitive firm, one would conclude that the monopolistically competitive firm produces less. In perfectly competitive markets, firms produce at a quantity where price equals marginal cost, which allows for allocative efficiency, meaning the social benefits equal the marginal costs.

However, in monopolistic competition, firms maximize profit by setting MR = MC, leading to a higher price than marginal revenue due to a downward sloping demand curve. As a result, monopolistically competitive firms charge a higher price and produce a lower quantity compared to perfectly competitive firms, generating allocative inefficiency. Long-run equilibrium in monopolistically competitive markets leads to zero economic profits due to the entry and exit of firms responding to profit opportunities.