Chapter 12R, Problem 16MCQ

To determine

The correct option that define the reason for inefficiency of the firm under monopolistic competition.

Answer to Problem 16MCQ

Option a and e are correct.

Explanation of Solution

Explanation for correct option:

a.

If the firm works on excess capacity then it mean the equilibrium output level is smaller than the output level at which cost is minimum. Therefore, option a is correct.

e.

The firm can be said inefficient if average total cost is increasing at higher rates as compared to the output level. Therefore, option e is correct

Explanation for incorrect options:

b.

Inefficiency occurs when prices are higher and quantities produced are smaller not when prices are low. Therefore, option b is incorrect.

c.

Inefficiency can be occurred even when firm is earning normal profit. This cannot be assured that the firm is inefficient if profit earned is zero. Therefore, option c is also incorrect.

.

d.

Another reason for inefficiency in monopolistic firm could be the quantity produced by the firm is not at minimum average cost and it is produce where price exceeds marginal cost. Therefore, option d is incorrect.

Economics Concept Introduction

Monopolistic market structure: Market structure where there are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.