Question

How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

1) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit.
2) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production.
3) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible.
4) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level.

Answer 1

In monopolistic competition, firms lack productive efficiency, charge a higher price than average cost, and do not fully utilize economies of scale.

Step-by-step explanation:

In a perfectly competitive market, firms sell at a price determined by the lowest point on the average cost curve, leading to productive efficiency. However, in monopolistic competition, firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom, resulting in a lack of productive efficiency.

Additionally, in monopolistic competition, firms charge a price higher than the average cost of production, whereas in perfect competition, firms charge a price equal to the average cost of production. This difference in pricing strategies is another distinction between the two types of industries.

Furthermore, monopolistic competition does not take full advantage of economies of scale, while in perfect competition, firms produce at the lowest average cost possible.