A monopolistically competitive industry does not display _______________ because ______________________.

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Starting from the principles of monopolistic competition, we analyze what efficiency properties such an industry attains. 
Option 1 suggests allocative efficiency occurs with P = MC, which would imply no deadweight loss and resources allocated where price equals marginal cost. However, in monopolistic competition, firms have some market power due to product differentiation, leading to P > MC at the equity-maximizing quantity and thus allocative inefficiency. This makes the statement false.
Option 2 states allocative inefficiency by saying allocative efficiency does not hold because P > MC. The reasoning aligns with the standard result: because firms charge a price above marginal cost, the quantity produced is less than the socially optimal level, creating a deadweight loss and a misallocation of resources. Therefore, this option correctly characterizes the inefficiency associated with monopolistic competition.
Option 3 posits productive efficiency with P < MC. Productive efficiency occurs when firms produce at the minimum average cost, which tends to be associated with industries where competition is intense enough to push prices down toward marginal cost, not with the typical monopolistic competition outcome. In practice, P > MC and often above minimum ATC due to excess capacity, so this claim is inconsistent with the usual profile of monopolistic competition.
Option 4 claims productive efficiency with P = MC. While P = MC would imply allocative efficiency, productive efficiency requires production at minimum average cost, and monopolistic competition typically does not operate at the minimum ATC due to excess capacity and brand differentiation. This makes the pair unlikely in this context, rendering the statement incorrect.
Overall, the correct line of reasoning is that monopolistic competition does not display allocative efficiency because price exceeds marginal cost, reflecting the presence of downward-sloping demand for differentiated products and some market power among firms. This combination explains why option 2 captures the standard inefficiency feature.

Econ 103 Makeup Exam Course Econ103 Makeup Final Exam Summer 2025

A monopolistically competitive industry does not display _ because ________.

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