A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market
A)chooses its profit-maximizing quantity where marginal revenue equals marginal cost.
B)sells its product in a highly-concentrated market.
C)faces a downward-sloping demand curve for its product.
D)can earn profits in the long run.

Question

Quizplus · Accepted Answer

A firm in a monopolistically competitive market faces a downward-sloping demand curve for its product, which means that it has some market power to increase the price of its product without losing all its customers. This allows the firm to choose a profit-maximizing quantity at which marginal revenue equals marginal cost, but the price it charges will be higher than in a perfectly competitive market. However, in the long run, firms in a monopolistically competitive market will only earn normal profits due to the low barriers to entry and the competition from close substitutes. Therefore, D is incorrect. Option B is not necessarily true, as a monopolistically competitive market can still have many firms, just with slightly differentiated products.

A Profit-Maximizing Firm in a Monopolistically Competitive Market Differs from a Firm