Which of the following statements best describes the price, output, and profit conditions of monopolistic competition?
A) Price will equal marginal cost at the profit-maximizing level of output; profits will be positive in the long-run.
B) Price will always equal average variable cost in the short run and either profits or losses may result in the long run.
C) Marginal revenue will equal marginal cost at the short run, profit-maximizing level of output; in the long run, economic profit will be zero.
D) Marginal revenue will equal average total cost in the short run; long-run economic profits will be zero.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power due to differentiated products, but there are also many firms competing in the market. In the short run, the profit-maximizing level of output occurs where marginal revenue equals marginal cost, but the price charged will be higher than the marginal cost due to market power. In the long run, new firms can enter the market and compete away any economic profits, leading to a zero economic profit equilibrium. Therefore, choice C is the best description of monopolistic competition.

Which of the Following Statements Best Describes the Price, Output