Question

true/false explain. Since the firms in a monopolistically competitive industry make zero profit in the long run (same long-run profit outcome as the perfectly competitive market), monopolistically competitive markets are as efficient as perfectly competitive markets.

Answer 1

Answer- FALSE

Monopolistically competitive markets are not as efficient as perfectly competitive market. A market is said to be efficient when the firms produces that level of output where average total cost is minimum. In the long run, perfectly competitive market produces that level of output where average total cost is minimum. Hence, they are efficient. But , in the long run, monopolistically competitive market produces a level of output which is less than the efficient scale of production( where average cost is minimum). Hence, they are inefficient in the long run. The long run equilibrium of a Monopolistically competitive firm will occur where AR=AC. As AR curve( demand curve) is downward sloping, the equality between AR and AC curves will take place at the downward sloping part of the AC(average total cost) curve i.e., to the left of minimum average total cost curve. Hence, it does not produces at that level of output where average total cost is minimum and hence is inefficient in the long run. The firm can increase it's production and produce at the point where average total cost minimum, but it does not makes use of this productive capacity because by doing so, the firm would reduce average revenue more than average total cost and it would incur losses. Hence, it operates at an inefficient level of output in the long run.