At the profit-maximizing output, price is greater than marginal cost
A)for a monopolistically competitive firm only in the short run
B)for a monopolistically competitive firm only in the long run
C)for a monopolistically competitive firm in both the short run and the long run
D)for a perfectly competitive firm only in the short run
E)for a perfectly competitive firm only in the long run

Question

Quizplus · Accepted Answer

In a monopolistically competitive firm, the firm has some market power due to product differentiation. Therefore, it can charge a price higher than its marginal cost to maximize profits. This is true both in the short run and the long run as long as the firm maintains its degree of product differentiation. In contrast, in perfect competition, firms are price takers and can only charge a price equal to their marginal cost in the long run. In the short run, a perfect competition firm may charge a price higher than its marginal cost due to temporary market fluctuations, but in the long run, market forces will drive the price down to equal the marginal cost.

At the Profit-Maximizing Output, Price Is Greater Than Marginal Cost