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 ▸How can a government manipulate floating exchange rate?
What are the characteristics of a perfectly competitive market structure?
Why do firms in a perfect competition always make normal profit in the long run?
Why GDP is not a good measurement of standards of living.