The behavior of the monopolistic firm
A)maximizes the benefits to consumers, given the resources available to the economy.
B)increases output in order to raise prices in the short term.
C)results in excess capacity and inefficiency.
D)results in entry into the market by other firms.

Question

Quizplus · Accepted Answer

Monopolistic firms have the ability to set prices higher than their marginal costs in order to maximize profits. This results in excess capacity as the firm does not reach the level of production where marginal cost equals marginal revenue. In the long run, this leads to inefficiency and reduced economic welfare. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect as they do not represent the behavior of a monopolistic firm.

The Behavior of the Monopolistic Firm