(1) Which of the following is TRUE of the price charged by a monopolistically co

Question

(1) Which of the following is TRUE of the price charged by a monopolistically competitive firm at the profit-maximizing level of output?

A. P < AVC

B. P > MC

C. P = MC

D. P = MR

(2) Monopolistic competition is characterized by

A.

B.

C.

D.

production at minimum average cost in the long run.

(3) In the below figure, when this monopolistically competitive firm produces its profit-maximizing output, it sets a per-unit price of

A)

B)

C)

D)

A.

relative ease of entry into the market.

B.

persistent long-run economic profits.

C.

a standard, undifferentiated product.

D.

production at minimum average cost in the long run.

(3) In the below figure, when this monopolistically competitive firm produces its profit-maximizing output, it sets a per-unit price of

A)

$10.

B)

$11.

C)

$13.

D)

$8.

Explanation / Answer

1) Option B. Price can be greater than or less than average total cost or average variable cost but it is always greater than marginal cost for imperfect competition.

2) Option A. There are no economic profits in the long run. There is also a product differentiation and excess capacity. There are relatively easy entry barriers and that is why there are no economic profits in the long run

3) MR = MC results in a quantity of 700 and so the relevant price is $11. Option B.

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