In the long run the monopolistic competitor

Question

Quizplus · Accepted Answer

Monopolistic competition involves firms selling differentiated products, giving them some degree of market power to set their own prices. In the long run, however, this market power is constrained by entry and exit of firms. As firms earn profits, new firms will be attracted to the market, increasing competition and driving down profits. In the long run, a monopolistic competitor will charge a higher price than the perfectly competitive firm as they have some market power, but will produce a smaller output as they face competition from other firms. This means that choice B, "charges a higher price but produces a smaller output than the perfect competitor," is the best answer.

In the Long Run the Monopolistic Competitor