Under monopolistic competition, long-run equilibrium maximizes consumer welfare by achievi… — JAMB UTME

Under monopolistic competition, long-run equilibrium maximizes consumer welfare by achieving both productive efficiency (producing at minimum $ATC$ ) and allocative efficiency (setting $P = MC$ ).

Answer: Answer

Answer

False. Monopolistically competitive firms achieve neither productive efficiency nor allocative efficiency in the long run because product differentiation gives them downward-sloping demand curves.

The statement is false because product differentiation grants monopolistically competitive firms market power. In long-run equilibrium, price exceeds marginal cost (

P > MC

), causing allocative inefficiency, and output is produced to the left of the minimum point of average total cost, causing excess capacity.

Step-by-Step Solution

Analyze the condition for allocative efficiency.

Allocative efficiency requires price to equal marginal cost (

P = MC

This condition ensures social welfare and consumer surplus are maximized.

Analyze the condition for productive efficiency.

Productive efficiency requires output to be produced at the lowest possible cost, where price equals minimum average total cost (

P = \text{minimum } ATC

This guarantees that resources are used in the most cost-effective manner.

Evaluate long-run equilibrium in monopolistic competition.

Because of product differentiation, firms face downward-sloping demand curves (

P > MR

). At profit maximization (

MR = MC

), price exceeds marginal cost (

P > MC

), and production occurs at a point where

ATC

is still falling.

This generates excess capacity and deadweight loss, preventing the market from achieving full economic efficiency or maximizing consumer welfare.

Key Concept

Efficiency Differences Between Monopolistic Competition and Perfect Competition

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