Practice Problem Which of the following is NOT a key feature of monopolistic competition? A) A...

Practice Problem

Which of the following is NOT a key feature of monopolistic competition?

A) A markup of price over marginal cost

B) Positive economic profits for firms in the long run

C) Differentiated products among firms in the market

D) Excess capacity

Solutions

Expert Solution

Option B

B) Positive economic profits for firms in the long run

A monopolistic competitive market has free entry and exit in the market. It has its output differentiated from each other.

The firm produces at MR=MC, and the efficient level is at MC=ATC

the level of output MR=MC is lower than the MC=ATC because the MR curve is downward slopigna and MC curve is upward sloping. so the firm has excess capacity at the pofit maximzing level of output.

The firm firm differntiate products to have some market power.

The firm hase P>MC so there is a markup over MC because the firm has a downward sloping demand curve because of differentiaed product so the firm can charge a price above MC.

The market has free entry and exit, so the economic profit, in the long run, is zero because if there is an economic profit, then the new firms will enter up there is a zero economic profit and vice verse.

Rahul Sunny answered 1 year ago

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