Question

1. Perfect competition results in productive efficiency and allocative efficiency, while monopolistic competition results in ________.

A. allocative efficiency, but not productive efficiency.

B. productive efficiency, but not allocative efficiency.

C. both allocative and productive efficiency.

D. neither allocative nor productive efficiency.

2. Which best describes an oligopoly?

A. Firms operate without regard to the behavior of competing firms.

B. Firms face perfectly elastic demand curves.

C. Firms must make decisions based on the behavior or expected behavior of their competitors.

Answer 1

1) Option D) neither allocative nor productive efficiency.

Productive efficiency takes place where the production takes place at the least cost or at the lowest point of the Average Cost (AC) curve. Allocative efficiency is where no one else can be made better off without making someone else worse off. Neither these two efficiency happens in monopolistic competition where the equilibrium occurs where the Marginal Cost is equal to the Marginal Revenue.

2) Option C) Firms must make decisions based on the behavior or expected behavior of their competitors.

In an oligopoly, there are a few firms in the industry selling the same type of product or the service. So, these firms have to depend on the decisions of the their competitiors as the products they are selling are homogeneous in nature and if one firm reduces their price, their competitior firm will lose its profits.