Is monopolistic competition efficient? What will be an ideal ...

[09madisonrousseau09]

Is monopolistic competition efficient?
 
  What will be an ideal response?

Question 2

Prices of microbrewery beer (assume that this is a normal good) have risen steadily in recent years. Over this same period, prices for fermenting vats used in beer making have also risen and consumer incomes have fallen.
 
  Which of the following best explains the rising prices of microbrewery beer?
  A) The supply curve for microbrewery beer has shifted to the left while the demand curve for microbrewery beer has shifted to the right.
  B) The supply curve for microbrewery beer has shifted to the left more than the demand curve has shifted to the left.
  C) The demand curve for microbrewery beer has shifted to the left more than the supply curve has shifted to the left.
  D) The demand curve and the supply curve for microbrewery beer have both shifted to the right.

[lgoldst9]

Answer to Question 1

Monopolistic competition is not efficient by the requirement for allocative efficiency MSB = MSC. The price equals the consumer's willingness to pay, which is the marginal social benefit and the firm's marginal cost is the marginal social cost. Product differentiation in monopolistic competition means that P > MR, which implies that P > MC at the quantity where MR = MC. Because P = MSB and MC = MSC, the result is that MSB > MSC, which signals inefficiency. However, when compared to the perfectly competitive alternative that all goods are identical, the variety offered by monopolistic competition makes monopolistic competition potentially efficient.

Answer to Question 2

B