Multiple Choice
In monopolistically competitive industries, which of the following is typically true?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
In the short run, a firm operating in a monopolistically competitive market can:
A
earn positive economic profits
B
face perfectly elastic demand for its product
C
only break even and never earn profits
D
produce at the minimum point of its average total cost curve
Verified step by step guidance1
Understand the characteristics of a monopolistically competitive market in the short run: firms have some market power due to product differentiation, allowing them to set prices above marginal cost.
Recall that in the short run, firms in monopolistic competition can earn positive economic profits because there are no immediate entry or exit of firms to erode these profits.
Analyze the demand curve faced by the firm: it is downward sloping (not perfectly elastic) because the firm’s product is differentiated, giving it some price-setting power.
Consider the firm's cost structure and output decision: the firm does not necessarily produce at the minimum point of its average total cost curve in the short run, as it maximizes profit where marginal revenue equals marginal cost.
Conclude that the firm can earn positive economic profits in the short run, but this situation may change in the long run as new firms enter the market, driving profits to zero.
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