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Let's imagine there's only one final good produced by one firm, in a perfect competition market. In the intermediate market, we have $N$ goods which are produced and used as factor inputs for the production function of the final good. The intermediate market is characterized by being monopolistically competitive, where firms only use labour as a factor input. Households consume the final good only, and supply labour.

I'm interested in references for models in this setting, because I'm reading Michael Wickens Macro book, and in page 228 (2nd edition), does the following:

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I understand the math behind the equation. What I don't understand is how the author can state that there is an efficiency loss? (The final good production function is a discrete version of a CES function)

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