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
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