Question

Are firms in a monopolistic competition industry efficient, according to the economic definition of the term? What characteristic of monopolistic competition makes this outcome typical? Explain.

150 words, please.

Answer 1

A monopolistic comptitive market comprise of many sellers who sell differentiated product at their own price.

A firm faces downward sloping demand curve and marginal revenue curve lies below it. The firm faces U shaped average total and marginal cost curve.

Firm is efficient if it produces at the minimum point of average cost curve which is possible only in perfect competition where demand curve is horizontal. But here the downward sloping demand curve is tangent to average cost at its declining portion. Hence, there is inefficiency equal to difference between minimum average cost and cost at tangency point.

Logically also, a perfectly competitive firm supplies maximum at minimum price but not monopolistically competitive firm.

His decision related to price makes him inefficient, if he also decides to keep fix price, he can be efficient.