Chapter 12R, Problem 22MCQ

To determine

The correct option that defines the characteristics of monopolistic competition industry in long run.

Answer to Problem 22MCQ

Option e is correct.

Explanation of Solution

Explanation for correct option:

e.

Firms under monopolistic competition industry works at excess capacity. This is because they make no profit if marginal prices are equal to average total cost. So, firm’s sell where prices are more than the marginal cost and produces less quantity then the quantity at minimum average cost output. Therefore, option e is correct.

Explanation for incorrect options:

a.

As the firm operates at the level lower than the capacity at which minimum average total cost can be attain. Therefore, option a is incorrect.

b.

Allocative efficiency is not a characteristic of monopolistic competition as production level is inappropriate that can provide maximum benefit to consumers. Therefore, option b is also incorrect.

c.

In long run, monopolistic competition does not earn positive profit instead in long run economic profits are equal to zero as it is eliminated by exit or entry of the firms. Therefore, option c is incorrect

d.

Firms operate at the output level less than the output level where average total cost can be minimized. This is because firm is not ready to sell at lower prices so they produce less to charge higher prices for their produce. Therefore, option d is incorrect.

Economics Concept Introduction

Monopolistic market structure: Market structure where there are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.