Question

Which of the following are sources of inefficiency in a monopolistically competitive industry?

Answer 1

The source of inefficiency are the ''mark up'' and '' higher average total cost''.

A firm in monopolistically competitive industry charges the final product price which exceeds its marginal cost(at its profit maximizing level). It charges a mark up over the marginal cost. As the mark up charged is always greater than unity, price is also higher than MC leading to the fact of inefficiency which causes a net loss of consumer surplus and producer surplus.

A firm in monopolistically competitive industry faces the downward sloping demand curve and firm's profit maximising output is less than the output which is associated to the minimum average cost(AC). Thus it has an excess capacity and produces output at a level where price equals the average cost and not the minimum AC. This leads to inefficiency.