![]() When P > MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC-and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short run and in the long run. Thus, monopolistic competition will not be productively efficient. ![]() However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. ![]() This outcome is why perfect competition displays productive efficiency: goods are being produced at the lowest possible average cost. ![]() The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. Describe why monopolistically competitive markets are inefficient. ![]()
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