Question

 Is monopolistic competition efficient?

 Suppose that a firm produces footballs in a monopolistically competitive market. The following graph shows its demand (D) curve, marginal revenue (MR) curve, marginal cost (MC) curve, and average cost (AC) curve. Assume that all firms in the industry face the same cost structure. 

Place the tan point (dash symbol) on the graph to indicate the long-run monopolistically competitive equilibrium price and quantity for this firm. Next, place the purple point (diamond symbol) to indicate the point at which this firm would produce in the long run if it operated in a perfectly competitive market. 

Note: Dashed drop lines will automatically extend to both axes. 

Compare the average cost and the production level in the long-run equilibrium for a monopolistically competitive firm and a perfectly competitive firm by completing the following table. 

Because this market is a monopolistically competitive market, the firm's average cost in long-run equilibrium is _______ the long-run average cost it would achieve as a firm operating in a perfectly competitive market.

 The production level of a monopolistically competitive firm in long-run equilibrium is _______   the production level of a perfectly competitive firm. This difference in output is predicted by the _______ .

Answer 1

Answer:

Under	Average Cost(in $)	Production Level(in thousands)
Monopolistic Competition	50	30
Perfect Competition	45	45

Because this market is a monopolistically competitive market, the firm's average cost in long-run equilibrium is higher than long-run average cost it would achieve as a firm operating in a perfectly competitive market.

The production level of a monopolistically competitive firm in long-run equilibrium is lower than the production level of a perfectly competitive firm. This difference in output is predicted by the excess capacity theorem of monopolistic competition.