a) Evaluate the following claim: “Monopolistically competitive industries are strictly worse than perfectly competitive industries because long run monopolistic competition involves inefficient allocation of resources and product differentiation is wasteful.” Your answer should take into account the efficiency and the consumer welfare implications of both types of industry structures. Diagrams are not required, (but you may choose to use them if you think it will help).
Monopolistic competition is inefficient when compared to perfect competition for instance in perfect competition profit Maximizing output is where MC=MR whereas for same product in monopolistic competition MR>MC and correspondingly the output will also be lower than that of perfect competition so society as a whole loses certain quantity because of monopolistic competition than what it would have recieved with perfect competition also consumer have to pay higher price for the product which values lesser in perfect competition leading the consumer surplus to go down the combination of lower production with higher prices leads to inefficient outcome.
Society if chose to put their resources in some other product which have perfect competition it would have recieved more output of those goods and hence higher utility and value associated.
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