Question

It has been argued that as a result of not producing the quantity of output where unit cost is minimized, the monopolistic competitive firm charges too __________ a price and produces too __________ output.

Answer 1

Answer:

The correct answer is: high; little.

Explanation:

In monopolistic competition, a firm produces at the level of output where the marginal revenue is equal to marginal cost. The firm is able to maximize its profit at this point.  

However, the socially optimal level of output is where the price is equal to marginal cost. This level of output is greater than the profit-maximizing level of output and charges a lower price.  

But since the firm is a price maker, it produces at the point where MR equals MC. At this point, the price is higher and the output produced is smaller. This creates a deadweight loss in the market.