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Question
Macroeconomics
Posted 2 months ago

Which of the following correctly describes economic profits and allocative efficiency for a firm in monopolistic competition in long-run equilibrium?

Choose 1 answer:
A) It earns zero economic profits and is allocatively efficient.
(B) It earns zero economic profits and is allocatively inefficient.
(c) It earns zero economic profits and is allocatively neutral.
(D) It earns negative economic profits and is allocatively efficient.
(E) It earns positive economic profits and is allocatively inefficient.
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Answer from Sia
Posted 2 months ago
Solution
a
Long-run equilibrium in monopolistic competition: In the long run, firms in monopolistic competition will earn zero economic profits due to the entry and exit of firms in the market. This is because if firms were making positive economic profits, new firms would enter the market, increasing supply and driving down prices until profits are zero. Conversely, if firms were making losses, some would exit the market, decreasing supply and raising prices until losses are eliminated
b
Allocative efficiency: Allocative efficiency occurs when the price of a good equals the marginal cost of production (P=MCP = MC). In monopolistic competition, firms have some market power, which allows them to set prices above marginal cost (P>MCP > MC), leading to allocative inefficiency
Answer
(B) It earns zero economic profits and is allocatively inefficient.
Key Concept
Long-run equilibrium and allocative efficiency in monopolistic competition
Explanation
In the long run, a firm in monopolistic competition will earn zero economic profits due to the free entry and exit of firms, but it will be allocatively inefficient because it sets a price greater than marginal cost.

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