Final answer:
Monopolistic competition is seen as inefficient because it leads to prices that exceed marginal costs, unlike in perfect competition where productive efficiency is achieved. This inefficiency stems from the firms not operating at the lowest point on the average cost curve. The correct answer is a. price exceeds marginal cost.
Step-by-step explanation:
Monopolistic competition is considered by some to be inefficient because price exceeds marginal cost. This is primarily because firms in monopolistic competition do not produce at the lowest point on the average cost curve, known as productive efficiency, which is achieved in perfect competition. Instead, firms in monopolistic competition end up with a price that lies on the downward-sloping portion of the average cost curve.
In the long run, entry and exit in monopolistic competition drive firms toward a zero economic profit outcome. Nonetheless, this outcome is not synonymous with productive efficiency as it would be under perfect competition, due to the firms operating with excess capacity and charging a price that exceeds marginal costs. It's important to note that monopolistic competition also differs from monopolies, where a single entity controls the entire market.
In conclusion, option a. price exceeds marginal cost is the correct answer because, in monopolistic competition, firms charge a price above the marginal cost, leading to an inefficient outcome compared to perfect competition.