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Monopolistically Competitive Markets Have Two Main Sources of Inefficiency: Mark-Up

question 27

Essay

Monopolistically competitive markets have two main sources of inefficiency: mark-up over marginal cost, and externalities associated with entry of new firms.Explain how these inefficiencies can have an impact on total welfare (Hint: there are both positive and negative externalities associated with firms entering the market).


Definitions:

Shareholder

An individual or organization that owns shares in a corporation, thus holding a portion of the company's stock.

Board Of Directors

A group of individuals elected to represent shareholders and make decisions on major company issues, such as corporate policy, hiring executives, and overseeing management.

Market Rate Of Return

The average rate of return anticipated from an investment relative to the market as a whole.

Required Return

The minimum expected return by investors for assuming the risk of investing in a particular asset or project.

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