Which of the following best describes the efficiency of...

Name: Problem 3, Chapter 13: Economics: Principles, Problems, and Policies
Uploaded: 2020-05-07T19:50:18-08:00
Duration: 3 min 36 s
Channel: Marianne Hayek
Description: Which of the following best describes the efficiency of monopolistically competitive firms? a. Allocatively efficient but productively inefficient. b. Allocatively inefficient but productively efficient. c. Both allocatively efficient and productively efficient. d. Neither allocatively efficient nor productively efficient.

Which of the following best describes the efficiency of monopolistically competitive firms? a. Allocatively efficient but productively inefficient. b. Allocatively inefficient but productively efficient. c. Both allocatively efficient and productively efficient. d. Neither allocatively efficient nor productively efficient.

Which of the following best describes the efficiency of monopolistically competitive firms?
a. Allocatively efficient but productively inefficient.
b. Allocatively inefficient but productively efficient.
c. Both allocatively efficient and productively efficient.
d. Neither allocatively efficient nor productively efficient.

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Key Concepts

Productive Efficiency

Productive efficiency is achieved when goods and services are produced at the minimum possible cost, which occurs where average total cost is minimized. In monopolistic competition, firms usually do not produce at the minimum point of their average cost curve, meaning that production is not cost-efficient, leading to productive inefficiency.

Allocative Efficiency

Allocative efficiency occurs when the mix of goods and services produced in the economy represents what society most desires, meaning that resources are distributed in a way that maximizes overall welfare. In economic terms, it is achieved when prices equal marginal costs. In monopolistic competition, firms typically set prices higher than marginal costs, resulting in allocative inefficiency.

Monopolistic Competition

Monopolistic competition is a market structure characterized by many firms that sell differentiated products. This differentiation allows each firm a degree of market power, enabling them to set prices above marginal cost. However, the presence of many competitors and the ease of entry and exit in the market ensures that such pricing power is limited in the long run.

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