A monopolistically competitive firm continues to make profits so long as P AC.

Question

A monopolistically competitive firm continues to make profits so long as P > AC.

Quizplus · Accepted Answer

In monopolistic competition, firms can charge a price higher than their average cost (AC) in the short run since they have some market power due to product differentiation. As long as the price (P) remains higher than average cost (AC), the firm can make profits in the short run. However, in the long run, other firms may enter the market, competing away the profits, leading to a situation where P = AC and the firm earns zero economic profit.

A Monopolistically Competitive Firm Continues to Make Profits So Long