When P MC, output is at the socially efficient level in a monopolistically competitive firm.

Question

When P > MC, output is at the socially efficient level in a monopolistically competitive firm.

Quizplus · Accepted Answer

When P > MC in a monopolistically competitive firm, the firm is producing at a quantity where it is earning economic profits. This is not socially efficient as the firm is not producing at the minimum point on the long-run average cost curve (where MC = LRAC), which would result in the lowest possible price for consumers. Therefore, the output level is not at the socially efficient level in a monopolistically competitive firm when P > MC.

When P > MC, Output Is at the Socially Efficient