Question

Is a monopolistically competitive firm productively efficient? Is it allocatively efficient? Why or why not?

Short answer

A monopolistically competitive firm is not productively efficient and not also allocatively efficient.

Step-by-step solution

Step 1. Definition

A monopolistic firm is a blend of monopoly firm and a perfectly competitive firm. Though a large number of sellers operate in the market, product differentiation makes them act like a monopoly.

Step 2. Explanation

A monopolistically competitive firm does not produce at the bottom or at the lowest point of its average cost curve, so it is not productively efficient.

It also not allocatively efficient because it produces at a point where the price is greater than marginal cost instead of beign equal to the marginal cost.

Step 3. Conclusion

Thus, it will produce a relatively lower quantity and charge a higher price than a perfectly competitive firm.