In monopolistic competition, the long-run equilibrium price _____ marginal cost because _____.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms face downward-sloping demand curves because their products are differentiated, meaning they are not perfect substitutes for each other. This allows firms to have some market power and charge a price that exceeds marginal cost. However, in the long run, economic profits attract new firms to enter the market, increasing competition and reducing the market power of existing firms. As a result, firms earn zero economic profit in the long run and the price eventually equals marginal cost. Therefore, option A is incorrect. Option C is incorrect because monopolistic competition is characterized by low barriers to entry. Option D is also incorrect because firms do not set their production plans simultaneously in monopolistic competition.

In Monopolistic Competition, the Long-Run Equilibrium Price _____ Marginal Cost