Question

5. Does the monopolistically-competitive firm achieve productive and allocative efficiency in the long run? How does this affect consumers in the market? How might this be different from perfect competition in the long run?

Answer 1

Ans) In perfect competition, there are many sellers selling homogeneous products. Sellers are hence price takers. In short run, firms may earn economic profit but in long run, they earn zero economic profit. Further, firm produces the quantity where MR and MC curve intersect.

Monopolistic market is where there are many sellers selling homogeneous but differentiated products. Sellers are hence not price takers. Here, price is equal to marginal revenue. In short run, firms may earn economic profit but in long run they earn zero economic profit. Further, firm produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price.

Though both competitive firm and monopolistic firm earn zero economic profit in long run but in competitive market, firms operate at minimum of ATC, where allocative and productive efficiency is reached. Whereas in monopolistic market, firms do not operate at minimum of ATC and quantity produced will be less than socially optimal quantity.

Therefore, consumers get to pay low price in competitive market but not in monopolistic market.

(Condition for zero economic profit ÷ Price is equal to ATC)