Question

(b) It is argued that monopolistic competition is inefficient. With the aid of diagrams, explain this statement. In addition, briefly outline the arguments in favour of monopolistic competition.

Answer 1

Monopolistic competitions are inefficient In the market because they try to maximise the profit in the market and while doing that they produce at a point where the MR=MC, that make them produce less than perfect market and at a price that is higher than the perfect market.

they operate with an excess capacity that increases the dead weight loss,

. Here, the monopoly is producing at a point where the MR = MC and casing a dead weight loss having an excess capacity.

A monopoly producing at the point Q and selling a the price P. Price MC ATC ATC Excess capacity AR = Demand QS Quantity Q* MR Monopolistic market.

Monopoly are better in terms of having a variety of goods in the market that the perfect competition doesn't have that. increased variety of the goods are one of the benefits of the monopoly.