Question

"In the long run, there is no difference between monopolistic competition and perfect competition." Discuss whether this statement is true, false, or ambiguous with respect to the following criteria. a. The price charged to consumers b. The average total cost of production c. The efficiency of the market outcome d. The typical firm's profit in the long run

Short answer

Question: In the long run, is there any difference between monopolistic competition and perfect competition in terms of: a. The price charged to consumers b. The average total cost of production c. The efficiency of the market outcome d. The typical firm's profit in the long run Answer: a. Yes, there is a difference. The price charged to consumers in monopolistic competition will be higher than in perfect competition. b. The difference is ambiguous and may depend on the specific industry. c. Yes, there is a difference. Monopolistic competition is less efficient than perfect competition in terms of both allocative efficiency and productive efficiency. d. No, there is no difference. In both monopolistic competition and perfect competition, firms make zero economic profit in the long run.

Step-by-step solution

a. The price charged to consumers

In monopolistic competition, each firm has some market power and can set their own price, which will be higher than their marginal cost of production. In perfect competition, firms are price takers and cannot influence the market price. Thus, the price charged to consumers in monopolistic competition will be higher than in perfect competition. This statement is false with respect to the price charged to consumers.

b. The average total cost of production

In monopolistic competition, firms might have higher average total costs of production compared to those in perfect competition if they engage in product differentiation, advertising, and other non-price competition strategies. However, this is not always the case and might depend on the specific industry. Thus, the statement is ambiguous with respect to the average total cost of production.

c. The efficiency of the market outcome

There are two types of efficiency to consider: allocative efficiency and productive efficiency. In terms of allocative efficiency, monopolistic competition is less efficient than perfect competition, because prices are higher than marginal costs, leading to a deadweight loss. In terms of productive efficiency, monopolistic competition might also be less efficient, as firms do not produce at the lowest possible average total cost. Thus, the statement is false with respect to the efficiency of the market outcome.

d. The typical firm's profit in the long run

In both monopolistic competition and perfect competition, firms make zero economic profit in the long run. In monopolistic competition, if firms make positive profits, new firms will enter the market, increasing competition and eroding existing firms' profits. Similarly, in perfect competition, firms that make positive profits will attract new entry until the profit is driven to zero due to increased competition. Therefore, the statement is true with respect to firms' long-run profits. In conclusion, the statement "In the long run, there is no difference between monopolistic competition and perfect competition" is: - False with respect to the price charged to consumers - Ambiguous with respect to the average total cost of production - False with respect to the efficiency of the market outcome - True with respect to the typical firm's profit in the long run