Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?
What will be an ideal response?
No. Although monopolistically competitive firms reduce total economic surplus by producing less than the efficient amount (creating a deadweight loss) they also increase consumer welfare because people are willing to pay more for variety and for products that are more closely suited to their tastes. Consumer welfare can be measured by consumer surplus.
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Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal
marginal utility per dollar spent, the extra satisfaction received from the last shirt must be A) 2,000 units of utility. B) 500 units of utility. C) 100 units of utility. D) 80 units of utility.
If a firm in a monopolistically competitive market has a demand curve shifting to the right, it is likely that:
A. positive economic profits are being earned. B. firms are entering the market. C. the selling price is less than the average total cost of the firm. D. All of these statements are true.