Unlike a perfectly competitive firm, a monopolistically competitive firm
A)faces a perfectly inelastic demand curve.
B)can earn positive economic profit in the short run and in the long run.
C)cannot earn positive economic profit even in the short run.
D)does not have the same marginal revenue at every output level.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power due to product differentiation, so they face a downward-sloping demand curve. This means that the firm's marginal revenue will be below the price of the good, and will decrease as the firm increases output. Therefore, the firm does not have the same marginal revenue at every output level, making D the correct choice. While monopolistically competitive firms can earn positive economic profit in the short run, they will face competition from other firms entering the market, making it difficult to sustain economic profits in the long run. Therefore, B and C are incorrect choices. Firms in monopolistic competition also do not face a perfectly inelastic demand curve, so A is also incorrect.

Unlike a Perfectly Competitive Firm, a Monopolistically Competitive Firm