“In the long run, monopolistic competition leads to a monopolistic price but not
ID: 1223577 • Letter: #
Question
“In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.” This statement is
A. true since P > MC, but the availability of close substitutes pushes the price of the average firm down until it equals ATC.
B. false since P > MC, but the availability of close substitutes pushes the price of the average firm down until it equals ATC
C. . false since P < MC, but the lack of available close substitutes pushes the price of the average firm up until it equals ATC.
D. true since P < MC, but the lack of available close substitutes pushes the price of the average firm up until it equals ATC.
Explanation / Answer
“In the long run, monopolistic competition leads to a monopolistic price but not to monopolistic profits.” This statement is true since P > MC, but the availability of close substitutes pushes the price of the average firm down until it equals ATC. The reason behind this is, a monopolist will produce at a point where monopolistically downward sloping demand curve is tangent to ATC curve, which is higher than perfectly competitive price. But due to close substitute price will fall upto it equals to ATC. And as a result there will be no economics profit.
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