Using a diagram, explain why firms in monopolistic competition are neither allocatively nor productively efficient?
Assumptions: large no. of firms in the industry, relatively small firms, low barriers to entry, perfect knowledge, product differentiation Allocative efficiency: MC=AR and the market allocated resources so that social surplus is maximisedProductive efficiency: MC=AC and the firm produces at its lowest possible average total costs Firms aim to profit maximise = neither allocatively nor productively efficient
SL
Related Economics IB answers
All answers ▸Consider a competitive market, that has recently had an ad valorem sales tax imposed. Show this on a diagram. What is the impact on the market equilibrium? If the demand curve becomes more inelastic, which side of the market suffers more?
What is a negative externality and how can you address them?
What is the difference between a shift and a movement in the demand (or supply) curve?
How many diagrams do I have to draw in an answer, and how do I use them in my answer?