In the short run,a monopolistically competitive firm produces at the optimal level of output and is earning positive economic profits.Which expression must be TRUE for this firm?
A)MR = MC and P = ATC.
B)MR = MC and P ATC.
C)MR MC and P = ATC.
D)P = MR = MC ATC.

Question

In the short run,a monopolistically competitive firm produces at the optimal level of output and is earning positive economic profits.Which expression must be TRUE for this firm?
A)MR = MC and P = ATC.
B)MR = MC and P > ATC.
C)MR > MC and P = ATC.
D)P = MR = MC > ATC.

Quizplus · Accepted Answer

In monopolistically competitive markets, firms have some degree of market power and can set prices above their marginal cost, unlike perfectly competitive firms that face a horizontal demand curve at the market price. In the short run, if the firm is earning positive economic profits, it must be that its price (P) is greater than its average total cost (ATC), since otherwise it would be making losses. 
Moreover, the firm will produce where marginal revenue (MR) equals marginal cost (MC) to maximize its profits. Hence, the correct expression for a firm in this scenario is MR = MC and P > ATC.

In the Short Run,a Monopolistically Competitive Firm Produces at the Optimal