Question

	Which of the following is not a characteristic of monopolistic competition?
	Zero long-run economic profit Relatively large number of seller Nonprice competition Recognize mutual interdependence among firms

	Which of the following is not a characteristic of the long-run equilibrium for a monopolistically competitive competitive firm?
	Marginal revenue equals marginal cost Price equals the minimum (short-run and long-run) average total costs Long-run economic profit is equal to zero Price is greater than (short-run and long-run) marginal cost

	Market structure where firms are most likely to underutilize production capacity is:
	Perfect competition Monopolistic competition Oligopoly monopoly

Answer 1

1. Option D

• Mutual interdependence is not a characteristic of monopolistic competition. Rather it is a characteristic of an oligopoly.
• Monopolistic competition is a market structure in which large number of firms sell differentiated products from each other.
• These firms earn zero Economic profit in the long run and face non price competition.

2. Option B

• Firms in a monopolistically competitive market tend to maximize their profits by selling their marginal cost equal to marginal revenue and earn zero Economic profit in long run.
• The statement that price equals minimum average total cost is false about this market because in long run, firms set their prices greater than the marginal cost.

3. Option B

• Market structure where firms are most likely to underutilize production capacity is monopolistic competition.
• Underutilization of excess production capacity is also known as excess capacity when the demand is less than the full capacity output of a firm.
• Firms in a monopolistically competitive market are said to have excess capacity as they do not produce at minimum average total cost which causes them underutilize production capacity.