Question

Monopolistically competitive firms do not earn profit in the long-run but still they are considered inefficient. Explain briefly.

Answer 1

Answer : Monopolistic Competition is a imperfect market competition that producers are selling differentiated product in the market. As in the long run they are earning zero economic profit but the monopolistic competition are always considered as inefficient as follows

• The main reason is that at its efficient output level , the firm charges a price that exceeds marginal cost and that level is not profit maximization point. As the profit maximization point is thew level where MR=MC. As demand curve of the firm is downward sloping which means that it will charge a price that exceeds market power. This shows that the firm is inefficient.
• As inefficiency lies because the firm are operating with excess capacity. The firm profit maximization level of output is less than the output related to minimum average cost. As in monopolistic competition regardless of the profit level they will produce the output that provide them minimum average cost. There main motive is to reduce the average cost of the business.

These are reason which lead to inefficiency created in an monopolistic competition market. There main aim is to reduce average cost which lead them inefficient market association.