Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency
Explain why this is the case.
Unlike the perfectly competitive firm, the monopolistically competitive firm faces a downward sloping demand curve which means that the firm must lower its price to sell additional units of output. As a result, price will always be greater than marginal revenue (P > MR). By contrast, the perfectly competitive firm faces a horizontal demand curve and P = MR. The profit-maximizing rule, MR = MC, applies to all firms but because in perfect competition P = MR the rule can be written as P = MC. A firm achieves allocative efficiency if it charges a price equals to the MC of producing the last unit. This condition is satisfied at the profit-maximizing output for the perfectly competitive firm (since P = MC = MR) but will not hold for the profit maximizing output of monopolistically competitive firm for which P > MR = MC.
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