What would regulating monopolistically competitive firms to set price equal to marginal cost result in?
A) firms shutting down since price would be less than AVC
B) firms exiting the industry since price would be less than the long run AC
C) an increase in MC as firms try to comply with the new regulations
D) few firms entering the industry since price would be greater than AC

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some degree of market power which allows them to set prices above marginal costs. If they were regulated to set prices equal to marginal costs, they would not be able to cover their average costs in the long run, leading to firms exiting the industry.

What Would Regulating Monopolistically Competitive Firms to Set Price Equal