Which of the following is a major drawback of monopolistic competition?

• A. Consumers have no variety in product choices.
• B. Firms do not achieve productive efficiency, leading to higher average costs.
• C. There are significant barriers to entry that prevent new firms from entering the market.
• D. Firms are unable to differentiate their products from competitors.

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: many firms, product differentiation, free entry and exit, and some degree of market power.
2. Recall that in monopolistic competition, firms produce differentiated products, so consumers do have variety in product choices, which eliminates the first option.
3. Recognize that there are low or no significant barriers to entry in monopolistic competition, so the third option about significant barriers is incorrect.
4. Note that firms in monopolistic competition differentiate their products, so the fourth option about inability to differentiate is incorrect.
5. Focus on the concept of productive efficiency: firms in monopolistic competition do not produce at the lowest point on their average cost curve, leading to higher average costs, which is a major drawback.