Explain the difference between productive efficiency and allocative efficiency. How do these efficiencies relate to monopolistic competition?
What will be an ideal response?
Productive efficiency happens when a firm produces an output that allows for the lowest average total cost. As a result, the demand curve is tangent with the ATC curve at the latter’s lowest point. With allocative efficiency, a customer pays the same amount for a product that it cost a firm to produce it. Therefore, with allocative efficiency, price equals marginal cost (P = MC). Monopolistically competitive firms fail to meet both productive efficiency and allocative efficiency. They produce less than what would allow the lowest cost. Also, they charge a higher price for a product than it costs them to make it.
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