Question

Which of the following is true under monopolistic competition in the short run?

Select one:

A. P > MC.

B. Profits are always zero.

C. P = MR.

D. All of the choices are true in monopolistic competition.

Answer 1

As we know,

Monopolistic competition is the combination of monopoly and perfect competition. Under Monopolistic competition there are many firms which are selling similar products with very slight difference. There are no barriers to entry and exit. But in short run a large entry and exit is not seen.

The equilibrium condition here as well is at that point of output where MC = MR.

This is shown in below figure

So from the above diagram we can see under Monopolistic competition under short run :-

Equilibrium output is at Qs where MR = MC.

Let's look at each option :-

A. P > MC :- We can see in above figure P > MC as MC is being decided when MC = MR and as MR curve is always below the AR curve which decides price. So P > MC is always correct.

B. Profits are always zero :- Profit per unit is equal to the price level (P) minus Average Cost (AC). So as long as this is obeyed there will be positive profits as seen above. So Zero Profit is wrong.

C. P = MR :- As we know under equilibrium MR = MC and since as explained above P > MC so it's implied that P > MR. So P = MR is wrong.

D. As choices B and C are wrong. So all choices are true is wrong.

So, Only Option A is correct

• Hence, A. P > MC is correct