If Monopolistically Competitive Firms Earn Short-Run Economic Profits, We Expect

question 235

Multiple Choice

If monopolistically competitive firms earn short-run economic profits, we expect to see

• A) new firms enter the industry, which shifts the demand curves of the existing firms to the left until firms earn zero economic profits.
• B) new firms trying to enter the industry, but unable to do so because of barriers to entry.
• C) existing firms altering their scale of plant to try to capture larger profits. The combined effect is to cause all firms to earn zero economic profits.
• D) existing firms increasing prices to try to capture larger economic profits.

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Definitions:

Marginal Cost

The escalation in the entire cost linked to the output of an additional unit.

Average Cost

The cost per unit is determined by dividing the overall production cost by the total units produced.

Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the quantity of output produced.

Total Cost

The sum of fixed and variable costs incurred in producing a given level of output.