Which of the following is true under monopolistic competition in the short run?
A) Profits are always zero.
B) P MC.
C) P = MR.
D) All of the choices are true in monopolistic competition.

Question

Which of the following is true under monopolistic competition in the short run?
A) Profits are always zero.
B) P > MC.
C) P = MR.
D) All of the choices are true in monopolistic competition.

Quizplus · Accepted Answer

In the short run, firms under monopolistic competition can make positive economic profits since they have some market power to set prices above their marginal costs. However, these profits can only be temporary as entry of new firms with similar but slightly differentiated products will drive down demand for existing firms, leading to a decrease in their market share and profits in the long run. In monopolistic competition, P > MC because the firms have some degree of market power to charge a higher price, but P < ATC because they are still subject to competition from similar products. P = MR because the demand curve is downward sloping, and to sell more units of output, the firms must lower their prices, which means that they must also lower the price of their existing units.

Which of the Following Is True Under Monopolistic Competition in the Short