Refer to the figure which shows a monopolistically competiti

Refer to the figure which shows a monopolistically competitive firm in a long run equilibrium situation. The firm’s profit maximizing quantity and price are:

A. both allocatively and productively efficient.
B. in the inelastic portion of the firm’s demand curve.
C. allocatively but not productively efficient.
D. productively but not allocatively efficient.
E. None of the above.

Solution

The answer is E – None of the above

Productive efficiency is when the price is set equal to the marginal costs, that is when the market is using all of its resources in an efficient manner. Where as allocative efficiency is achieved when the product is produced at the level where the social welfare is maximized. This happens when the price is equal to the marginal benefits as well as marginal cost.

As the product is always price higher than the marginal cost, the monopolistic market can never be productive or allocative efficient.