In the short run, a monopolistically competitive firm
A)will go out of business if it is incurring an economic loss.
B)always earns a positive economic profit.
C)may earn a positive, negative, or zero economic profit.
D)never incurs an economic loss.
E)will maximize profit by producing output such that price equals rising marginal cost.

Question

Quizplus · Accepted Answer

In the short run, a monopolistically competitive firm may earn a positive, negative, or zero economic profit depending on the market conditions and the level of differentiation of its product. However, it is possible for the firm to incur an economic loss if its total revenue is less than its total variable cost, although it may continue to operate in the short run as long as it can cover its fixed costs. The firm's profit-maximizing output level is where marginal revenue equals marginal cost, and the corresponding price will be higher than the marginal cost due to product differentiation.

In the Short Run, a Monopolistically Competitive Firm