CFA Practice Question

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CFA Practice Question

Critics of monopolistic competition argue that it is inefficient because firms ______
A. produce at an output that fails to minimize average total cost.
B. charge a price that exceeds average total cost when the market is in long-run equilibrium.
C. earn an abnormally high economic profit.
Explanation: Since ATC > MC and firms operate where MC = MR and P = ATC in the long run, this implies that P > MC. So, MC < ATC. It is also true that the MC curve intersects the ATC curve at the minimum of ATC. Therefore, production is occurring at a point other than where ATC is minimized. The critics of monopolistic competition are correct!

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