Econ HW Ch. 11

Pure competition does in the long run productive

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Unformatted text preview: rms, each of which produces too little”: If there is an entry of firms, there will be a larger number of rivals. This will mean the weaker the product differentiation and greater price elasticity of each seller’s demand. Monopolistic competition will be closer to pure competition with entries into the industry. In long run equilibrium, monopolistic competitors achieve neither productive nor allocative efficiency. (Pure competition does in the long run) Productive efficiency is not realized because production occurs where the average total cost A3 exceeds the minimum average total cost A4. Allocative efficiency is not achieved because the product price P3 exceeds the marginal cost M3. The results are an underallocation of resources as well as an efficiency loss and excess production capacity at every firm in the industry (see graph). #3. As long as consumers choose a certain product over another regardless of their prices, the seller of the product is a monopolist. However, in monopolistic competition, there are many other firms producing similar products. Once the monopolist’s price is too high, people will start choosing products based on their prices. This will be “competitive”. Therefore, these sellers will try to differentiate their products more or do something different so that they will become monopolistic again. #4. I agree because quality and service is something that is also valued by consumers. Monopolistically competitive firms prefer nonprice competition because it results in more monopoly power. It will allow firms to raise their p...
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