Which of the following statements is true:
A) The analysis of monopolistic competition in the short run is the same as monopoly.
B) The analysis of monopolistic competition in the short run is like monopoly but with entry and exit in the long run.
C) Monopolistically competitive firms produce more than competitive firms.
D) Monopolistically competitive firms charge prices lower than competitive firms.

Question

Quizplus · Accepted Answer

In the short run, monopolistic competition and monopoly are similar as both have some degree of market power to set prices above marginal cost. However, in the long run, monopolistically competitive firms can enter and exit the market, causing the market to become more competitive and reducing the market power of individual firms. This leads to a situation where price equals marginal cost in the long run, similar to a perfectly competitive market. Monopolistically competitive firms also tend to produce less than competitive firms due to the presence of excess capacity (i.e. producing less than the efficient scale). They also tend to charge higher prices than competitive firms due to product differentiation and the ability to charge a premium for their unique products.

Which of the Following Statements Is True