Question

Explain which types of market inefficiencies derive from monopolies. Use examples from the textbook to support your claims. Describe the types of inefficiencies that derive from monopolistic competition. Use examples from the textbook to support your claims. How are monopolies and monopolistic competitive firms profitable? Use examples from the textbook to support your analysis.

Answer 1

Answer:

The two types of market structure, monopoly, and monopolistic competition, generate essentially the same two types of market inefficiency:

Charging prices higher than marginal cost, meaning that consumers pay a higher price than they would otherwise in a perfectly competitive market.

Producing a smaller amount of output that in a perfectly competitive market.

The difference is in the degree of the inefficiency: monopolies are more market inefficient, and cause more harm to consumers, while monopolistic competition is a less inefficient market structure, and only causes marginal harm to consumers when compared to the hypothetical results of a perfectly competitive market structure.