Question

Monopolistically competitive firms:

a.earn a positive economic profit if price is greater than ATC.
b.are very similar to perfect competitors in producing at the minimum ATC.
c.engage in collusive activity to maximize profit.
d.will set price where MC > MR.

Answer 1

Answer:

The correct answer here would be option a. given in the answer choices or earn a positive economic profit if price is greater than ATC(Average Total Cost).

Explanation:

• Monopolistically competitive market is a particular type of market structure characterized by multiple number of firms producing and selling various differentiated products in the market.
• Monopolistically competitive firms usually have higher pricing and market power than a perfectly competitive market structure but less than the purely monopolistic market structure with only one seller.
• Since,the monopolistically competitive firms have limited market and pricing power as they sell differentiated products or services,they can evidently charge or set a price for their products or services greater than the Average Total Cost or ATC and earn positive economic profit in the market.
• However,due to presence of partial market competition or rivalry, any economic profit earned by the firms in the short run would attract more number of firms to enter the market in the long run until the chance of probability of earning any further economic profit is completely diminished.