In long-run equilibrium, a firm in a monopolistically competitive market operates where pr… — JAMB UTME

In long-run equilibrium, a firm in a monopolistically competitive market operates where price equals average total cost ( $P = ATC$ ), but price exceeds marginal cost ( $P > MC$ ) and remains above the minimum point of the average total cost curve ( $P > \text{min } ATC$ ). Compared to a perfectly competitive industry operating under identical cost conditions, which of the following best describes the efficiency and consumer welfare outcome?

The market fails to achieve both allocative and productive efficiency, resulting in excess capacity and a reduction in consumer welfare.Answer
B
The market achieves allocative efficiency because price equals average total cost, but fails to achieve productive efficiency due to barriers to entry.
C
The market achieves productive efficiency because long-run economic profits are zero, thereby maximizing net consumer surplus.
D
The market achieves allocative efficiency because firms maximize profits where marginal revenue equals marginal cost ( $MR = MC$ ), eliminating welfare loss.

Answer

The market fails to achieve both allocative and productive efficiency, resulting in excess capacity and a reduction in consumer welfare.

In long-run equilibrium under monopolistic competition, product differentiation gives firms downward-sloping demand curves. As a result, price exceeds marginal cost (

P > MC

), violating allocative efficiency, and price exceeds the minimum average total cost (

P > \text{min } ATC

), violating productive efficiency. The difference between the equilibrium output and the output at minimum ATC represents excess capacity, which lowers consumer welfare relative to perfect competition.

Step-by-Step Solution

Evaluate Allocative Efficiency (Price vs Marginal Cost)

Allocative efficiency occurs when price equals marginal cost (

P = MC

), meaning social marginal benefit equals social marginal cost. In monopolistic competition, because the firm faces a downward-sloping demand curve, price is greater than marginal cost (

P > MC

), leading to allocative inefficiency and deadweight loss.

When

P > MC

, consumers value additional units of the good more than the resource cost to produce them, leading to an under-allocation of resources.

Evaluate Productive Efficiency (Price vs Minimum ATC)

Productive efficiency occurs when goods are produced at the lowest possible cost, where price equals minimum average total cost (

P = \text{min } ATC

). In long-run equilibrium, the monopolistically competitive firm operates on the falling segment of its ATC curve (

P > \text{min } ATC

), resulting in excess capacity.

Product differentiation causes firms to operate with unutilized capacity rather than at maximum technical efficiency.

Synthesize Overall Efficiency and Consumer Welfare Impact

Since both

P > MC

(allocative inefficiency) and

P > \text{min } ATC

(productive inefficiency) hold, consumer surplus is lower than under perfect competition, creating a net efficiency and welfare loss.

Comparing long-run outcomes, perfect competition satisfies both efficiency conditions (

P = MC = \text{min } ATC

), whereas monopolistic competition fails both.

Key Concept

Economic Efficiency and Consumer Welfare in Market Structures

Estimated Time:2m 0s

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