The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Which of the following statements about a monopolistically competitive firm, in the short run, is true?
A)Profits will be maximized at the point at which price equals marginal cost and hence there is no deadweight loss.
B)The firms earn zero economic profit in the short run.
C)The firms achieve allocative and productive efficiency in the short run.
D)Advertising may enable a firm to charge a higher price than that charged by rival firms.
E)It faces a perfectly elastic demand curve.

Question

The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
  MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Which of the following statements about a monopolistically competitive firm, in the short run, is true?
A)Profits will be maximized at the point at which price equals marginal cost and hence there is no deadweight loss. 
B)The firms earn zero economic profit in the short run. 
C)The firms achieve allocative and productive efficiency in the short run. 
D)Advertising may enable a firm to charge a higher price than that charged by rival firms. 
E)It faces a perfectly elastic demand curve.

Quizplus · Accepted Answer

In monopolistic competition, firms have some control over the price they charge due to differentiation, but they face a downward sloping demand curve. Therefore, advertising can be used to create brand loyalty and differentiate a product, enabling a firm to charge a higher price than its rivals. In the short run, monopolistically competitive firms can earn positive economic profits, negative economic profits, or zero economic profits depending on the intersection of price and average total cost. However, they do not achieve allocative or productive efficiency in the short run.

The Figure Given Below Shows the Revenue and Cost Curves