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-maximising level of output; and 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 in the short run, profit-maximising level of output; and in the long run, economic profit will be zero.
D) Marginal revenue will equal average total cost in the short run; and long-run economic profits will be zero.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some market power, so they can charge a price above marginal cost, but they also face competition from other firms producing differentiated products. In the short run, a monopolistically competitive firm will produce where marginal revenue equals marginal cost to maximise profit. However, because of the excess capacity created by the firm's ability to differentiate its product, the firm will have a lower level of output than a perfectly competitive firm. In the long run, new firms can enter the market, increasing competition and reducing demand for each firm's product. This will cause the firm's demand curve to shift leftward and become more elastic, leading to a lower price and lower profits. Eventually, the firm will reach a point where it is making zero economic profit. Therefore, in the long run, economic profit in monopolistic competition will be zero.

Which of the Following Statements Best Describes the Price, Output