Explain why X-inefficiency is likely to be more prevalent in an indust

Explain why X-inefficiency is likely to be more prevalent in an industry in which firms have market power.

What will be an ideal response?

ANSWER

The assumed goal of firms is to maximize profits, i.e., the difference between total revenues and total costs. X-inefficiency refers to the situation in which firms have fewer incentives to minimize the costs of production.When there is less competition, there is not as much downward pressure on price and, therefore, total revenues. As such, there is less pressure on the firm to minimize costs to maintain a particular level of profit.