Question

 3. Is monopolistic competition efficient?

 Suppose that a firm produces baseball bats in a monopolistically competitive market. The following graph shows its demand curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average total cost (ATC) curve.

 Place a black point (plus symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place a grey point (star symbol) to indicate the minimum average total cost the firm faces and the quantity associated with that cost.

 Because this market is a monopolistically competitive market, you can tell that it is in long-run equilibrium by the fact that _______  at the optimal quantity for each firm. Furthermore, the quantity the firm produces in long-run equilibrium is _______  the efficient scale.

 True or False: This indicates that there is a markup on marginal cost in the market for bats.

•  True

•  False

  
  

 Monopolistic competition may also be socially inefficient because these are too many or too few firms in the market. The presence of the _______  externality implies that there is too little entry of new firms in the market.

Answer 1

In a monopolistic competitive market, long-run equilibrium is achieved when the average total cost equals the price, and the average sweeping cost curve is tangent to the demand curve. So, the correct option is OPTION D, that is, P=ATC.

In the long run, the efficiency level is achieved at the minimum of the average cost curve. The demand curve is tangent to the average total cost curve at the minimum of the ATC curve. In the given figure, the demand curve is tangent to the falling apart of the ATC curve; the long-run equilibrium is less than the efficient scale.

It is in the long-run equilibrium by the fact that P=ATC is at the optimal quantity for each firm. Furthermore, the firm's quantity in the long-run equilibrium is less than the efficient scale.

The markup over the marginal cost is done when the price is charged higher than the minimum of the average cost. In the given figure, the price is higher than the average cost. So, the given statement is TRUE.

The monopolistic competitive market has differentiated products. The sale of these products involves high selling costs and advertisement costs. These costs act as a barrier for many firms. So, product variety externality implies too little entry of new firms in the market.