Which of the following statements best describes the outcome under monopolistic competition ?
Correct answer: C. It is not efficient because too little output is produced and the output that is produced is produced at a cost above minimum average total cost
- A. It is efficient because the right amount of output is produced, but not efficient in that the output produced is produced at a cost above minimum average total cost
- B. It is efficient because entry is free and economic profits are eliminated in the long run.
- C. It is not efficient because too little output is produced and the output that is produced is produced at a cost above minimum average total cost
- D. It is not efficient because too little output is produced but is efficient in that the output produced is produced at minimum average total cost.
Explanation
Monopolistic competition produces less than the output that minimizes average total cost, creating excess capacity, and its price exceeds marginal cost. Thus it is inefficient in both output and productive-cost terms, as stated in c.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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