Which of the following correctly describes a monopolisticall

Which of the following correctly describes a monopolistically competitive industry? Monopolistically competitive industries are efficient. Monopolistically competitive firms face downward-sloping demand curves. Monopolistically competitive industries have prices that are equal to marginal cost. Monopolistically competitive industries have few firm:s For a monopolistically competitive firm in the short run O P O P O p > MC MC P ATC P MR.

Solution

Answer 1 - monopolistically competitive firms face downward-sloping demand curve.

Reason - A monopolistic competitive firm’s demand curve is downward sloping which reflects the law of demand. It implies that the price a monopolist can expect to receive for its output will not remain constant as the monopolist increases its output.

Answer 2 - P>MC

Reason - monopolistic competitive firms maximizes profits where marginal revenue equals marginal cost. It will charge a price which is higher than its marginal cost. These firms possess market power due to which they produce low quality goods and charge higher prices. At profit maximization level there will be loss of consumer and surplus of producer. Thus monopolistic competitive markets can lead to significant profits in the short-run.

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