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

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

Answer: (A)

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 the concept of productive efficiency, which occurs when firms produce at the lowest point on their average total cost (ATC) curve, minimizing costs.
3. Recognize that in monopolistic competition, firms produce at a level where price equals average total cost but not at the minimum ATC, meaning they do not achieve productive efficiency.
4. Note that product differentiation is a key feature of monopolistic competition, so firms are able to differentiate their products, providing variety to consumers.
5. Understand that there are low barriers to entry in monopolistic competition, allowing new firms to enter the market freely, which contrasts with markets that have significant barriers.