1...efficency in monopolistically competitive markets is evident because each fi
ID: 1238576 • Letter: 1
Question
1...efficency in monopolistically competitive markets is evident because each firmA) becomes the first firm in the market
B) produces with excess capacity
C) creayes more value relative to thier competitors
D) manages chance events
2... monopolistic competitive firms
A) earn no economic profit in the long run and do not produce efficiently
B)earn no economic profit in the long run but produce efficiently
C)earn economic profit in the long run and produce efficiently
D) earn economic profit in the long run and do not produce efficiently
Explanation / Answer
1. B) produces with excess capacity There are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds marginal costs, The MC firm maximizes profits where MR = MC. Since the MC firm's demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by an MC firm means that at its profit maximizing level of production there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firm's profit maximizing output is less than the output associated with minimum average cost. 2. A) earn no economic profit in the long run and do not produce efficiently The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit.
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