When a Profit-Maximizing Firm in a Monopolistically Competitive Market Charges

question 212

Multiple Choice

When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,

• A)the firm must be earning a positive economic profit.
• B)the firm may be incurring economic losses
• C)there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
• D)new firms will enter the market in the long run.

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Definitions:

Quantity Effect

Refers to the change in consumer behavior resulting from a change in the price of a product, where the quantity demanded increases as the price decreases and vice versa.

Total Revenue

The total amount of money received by a company for goods or services sold, before any expenses are subtracted.

Marginal Cost

The additional cost incurred from the production of one additional unit of a good or service.

Marginal Revenue

The extra revenue generated by the sale of an additional unit of a good or service.