A monopolistically competitive firm makes positive economic profits if ________.

Question

Quizplus · Accepted Answer

A monopolistically competitive firm can earn positive economic profits in the short run if it sets a price higher than its average total cost. The firm has some market power to set prices above its marginal cost, but because of competition, it cannot charge too high a price or it will lose customers to other firms. Therefore, in the short run, the firm may be able to earn economic profits if it can charge a price that covers its average total cost and provides a positive profit. However, in the long run, new firms may enter the market, reducing the demand for the original firm's product and reducing its market power, leading to zero economic profits in the long run.

A Monopolistically Competitive Firm Makes Positive Economic Profits If ________