Suppose a monopolistically competitive industry evolved into a perfectly competitive industry.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

In a perfectly competitive market, firms cannot charge a price higher than the market equilibrium price. Therefore, in the transition from monopolistic competition to perfect competition, the firm will be forced to lower its price to the market price, leading to an increase in output. This is because in monopolistically competitive markets, firms have market power and can charge higher prices for their products. In addition, firms in a perfectly competitive market produce at constant returns to scale, not decreasing returns to scale as stated in choice B. Choice C is also incorrect since the elasticity of demand would change in a perfectly competitive market because firms no longer have pricing power. Finally, the long-run equilibrium in a perfectly competitive market is characterized by firms producing at minimum average total cost, which implies the same level of output at lower prices than before the change, as stated in choice D.

Suppose a Monopolistically Competitive Industry Evolved into a Perfectly Competitive