Unlike a firm in a perfectly competitive market, a firm in a monopolistically competitive market:
A. can charge a price higher than ATC in the long run
B. can charge a price higher than MC in the long run
C. is not constrained by the demand curve, only by MR
D. makes a normal profit in the long run

Question

Unlike a firm in a perfectly competitive market, a firm in a monopolistically competitive market:
A.    can charge a price higher than ATC in the long run
B.    can charge a price higher than MC in the long run
C.    is not constrained by the demand curve, only by MR
D.    makes a normal profit in the long run

BlackTom AI · Accepted Answer

Question: Unlike a firm in a perfectly competitive market, a firm in a monopolistically competitive market:
Options:
A. can charge a price higher than ATC in the long run
B. can charge a price higher than MC in the long run
C. is not constrained by the demand curve, only by MR
D. makes a normal profit in the long run

Option A: Charging a price higher than average total cost (ATC) in the long run would imply supernormal profits persistently. In monopolistic competition, in the long run firms enter or exit until economic profit is driven to zero, so price equals average total cost (P = ATC) rather than exceeding it. Therefore, this statement is inconsistent with the long-run outcome.

Option B: Charging a price higher than marginal cost (MC) in the long run reflects typical monopolistic competition behavior, where firms have downward-sloping demand due to product differentiation and face a gap between price and MC. In the long run, P > MC generally holds because firms earn zero economic profit at P = ATC; since ATC > MC for most downward-sloping demand curves, there is a markup over MC. This captures the idea that firms have some price-setting power without earning excess profits in the long run.

Option C: Saying the firm is not constrained by the demand curve, only by MR is inaccurate. In monopolistic competition, the firm’s demand curve is downward-sloping and is crucial for setting price; marginal revenue (MR) is derived from that demand curve and determines the quantity choice through the profit-maximization condition, but the firm does not ignore the demand curve.

Option D: Making a normal profit in the long run is true for firms in perfectly competitive markets, but in monopolistic competition, long-run equilibrium yields zero economic profit as firms just cover their costs. While normal profit is part of the accounting concept, the specific economic outcome in monopolistic competition is P = ATC, not guaranteed above or below, and it is not that every firm earns strictly normal profit at all times. This wording can be misleading if interpreted as the long-run condition.

In summary, Option B best aligns with the long-run characteristics of monopolistic competition, where price exceeds marginal cost due to product differentiation and downward-sloping demand, even though economic profits are driven to zero due to entry and exit in the long run.

Unlike a firm in a perfectly competitive market, a firm in a monopolistically competitive market: A. can charge a price higher than ATC in the long run B. can charge a price higher than MC in the long run C. is not constrained by the demand curve, only by MR D. makes a normal profit in the long run

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