When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,
A)the firm must be earning a positive economic profit.
B)the firm may be incurring economic losses
C)there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
D)new firms will enter the market in the long run.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some market power and can charge a price higher than marginal cost. However, in the long run, new firms can enter the market and compete away any economic profits. If the firm is charging a price higher than marginal cost, it may not necessarily be earning a positive economic profit. It could be incurring economic losses due to higher production costs, or it could be earning normal profits. However, in this situation, there is a deadweight loss to society as the price exceeds marginal cost, and there is inefficiency in production. The benefit of excess capacity does not exactly offset this deadweight loss.

When a Profit-Maximizing Firm in a Monopolistically Competitive Market Charges