Which of the following is TRUE? Monopolistic competition and perfect competition
ID: 1194650 • Letter: W
Question
Which of the following is TRUE? Monopolistic competition and perfect competition are both inefficient. The inefficiency of monopolistic competition is a result of advertising expenses. The inefficiency of monopolistic competition may be a small price to pay for the wide range of product choices it offers. Monopolistic competition is efficient because of product differentiation. Which of the following is TRUE? Monopolistic competition and perfect competition are both inefficient. The inefficiency of monopolistic competition is a result of advertising expenses. The inefficiency of monopolistic competition may be a small price to pay for the wide range of product choices it offers. Monopolistic competition is efficient because of product differentiation.Explanation / Answer
The correct answer is c.
Since it entails some deadweight loss, the monopolistic competition is less efficient than perfect competition. But it offers consumers a range of products, whereas the products in the perfect competiton are all identical. Apart from that, due to entry or exit of firms in the long run in monopolistically competitive industry, the monopolistic firms, just like perfectly competitive firms, earn only normal profits. And therefore the deadweight loss in monopolistically competitive industry is not as high as in monopoly. Moreover, perfect competition is so hypothticaly that all economists agree that in reality, perfect competition is either nonexistent or extremely rare. For all these reasons, one may well contend that the inefficiency of monopolistic competition may be a small price to pay for the wide range of product choices it offers.
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