A significant benefit of monopolistic competition compared with pure competition is Multiple Choice greater product variety. stronger incentives to achieve economies of scale. improved resource allocation. less likelihood of X-inefficiency
The Correct Answer and Explanation is:
The correct answer is greater product variety.
Explanation
A significant benefit of monopolistic competition compared with pure competition is the greater product variety it offers to consumers. This is the defining characteristic that distinguishes the two market structures.
In a purely competitive market, all firms sell an identical, homogeneous product. There is no difference in quality, features, or branding between the goods offered by various sellers. Consumers choose based solely on price, as all products are perfect substitutes. Examples might include certain agricultural commodities like wheat or corn from different farms.
In contrast, monopolistic competition is characterized by product differentiation. Although there are many firms in the market, each one offers a product that is slightly different from its competitors. This differentiation can be based on branding (e.g., Nike vs. Adidas), quality (e.g., a craft brewery vs. a mass-market beer), design, location, or customer service. This variety allows consumers to choose products that best match their personal tastes and preferences, which is a significant non-price benefit.
The other options are incorrect. Monopolistic competition does not lead to stronger incentives to achieve economies of scale; in fact, firms in this structure typically operate with excess capacity, meaning they produce less than the output level that would minimize average cost. Resource allocation is less efficient than in pure competition because price is set above marginal cost (P > MC), indicating an underallocation of resources. Finally, the intense rivalry in pure competition creates a stronger incentive to eliminate waste and X-inefficiency than the slightly less competitive environment of monopolistic competition, where product differentiation provides a small cushion of market power. Therefore, the key trade-off and benefit of monopolistic competition is the rich variety it provides at the cost of some productive and allocative inefficiency
