Question

in the long run, a monopolistic competition firm makes zero profit but is inefficient . Why? Illustrate your explanation with a diagram. Also , indicate the excess capacity and price markup.

Answer 1

Here, the firm is in long run equilibrium as the price is equal to the ATC. but still the firm is inefficient because ideally they must be producing at the point where the ATC is minimum. That is point Q1. but as the demand curve for the firm is downward sloping the firm cannot expand the production and operate with the excess capacity.

the price markup is there because the firm should be producing at the point where the MC curve meets the demand curve. THe difference is shown as the price markup in the market.

THe firm will be producing at the point where the MR and the MC are equal. that is below the optimal level and at a highr price