1. A monopolistically competitive market could be considered to be inefficient b
ID: 1252317 • Letter: 1
Question
1. A monopolistically competitive market could be considered to be inefficient because
marginal cost exceeds marginal revenue (MC > MR).
price is always greater than average cost (P > AC).
price is greater than marginal cost (P > MC).
average cost (AC) is rising.
2. Barriers to entry are used to
Answer
enable a firm to exercise control over the price of its product.
prevent other firms from entering the market.
allow the firm to earn economic profit.
All of the above.
Explanation / Answer
1. A monopolistically competitive market could be considered to be inefficient because price is greater than marginal cost (P > MC). In a perfectly competitive market, P = MC. This results in the maximum of total welfare. However, monopolitically competitive markets result in each firm having market power due to brand preferences. As a result, P > MC, and there is a small amount of dead weight loss. Thus, monopolistically competitive markets are less efficient than perfectly competitive markets. 2. Barriers to entry are used to Answer All of the above. Barriers to entry prevent new firms from entering a market (by definition). By preventing entry, the incumbent firms can price above marginal cost without worrying about being undercut by new competition. As a result, incumbent firms are able to earn an economic profit in the long-run.
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