Monopolistic Competition

The administrtive burden of regulating price in monopolistically competive market:

A. small due to economies do scale

B. large because price is usually below marginal cost

C. large because of the large number of firms that produce differentiated products

D. small because firms produce with excess capacity

I picked D?

To determine the correct answer, let's analyze each option:

A. Small due to economies of scale:
Economies of scale refer to the cost advantages that firms can achieve when they produce on a larger scale. However, this option does not directly relate to the administrative burden of regulating price in monopolistically competitive markets. Therefore, option A is unlikely to be the correct answer.

B. Large because price is usually below marginal cost:
In monopolistically competitive markets, firms have some degree of market power and can set prices to maximize their profits. It is common for firms to set prices above their marginal costs. Therefore, option B does not accurately describe the administrative burden of regulating prices and is not likely to be the correct answer.

C. Large because of the large number of firms that produce differentiated products:
In monopolistically competitive markets, there are typically many firms that produce similar but differentiated products. Each firm has some freedom to set its prices based on the perceived value of its product. Consequently, regulating prices in such a market, given the large number of firms and their differentiated products, can be administratively burdensome. This option seems to align with the question's context and is a plausible choice for the correct answer.

D. Small because firms produce with excess capacity:
Excess capacity refers to the situation where firms have the ability to produce more output than they currently do. While this concept might affect pricing dynamics in a monopolistically competitive market, it does not necessarily directly address the administrative burden of regulating prices. Thus, option D is unlikely to be the correct answer.

Based on the analysis, option C appears to be the most suitable answer. It acknowledges the administrative burden associated with the large number of firms that produce differentiated products in a monopolistically competitive market.