Chapter 10: Problem 4

A monopolistically competitive firm will a. maximize profits by producing where \(M R=M C\) b. not earn an economic profit in the long run. c. shut down if price is less than average variable \(\operatorname{cost}\) d. do all of the above.

Short Answer

Expert verified

In conclusion, a monopolistically competitive firm will maximize profits by producing where \(MR = MC\), will not earn an economic profit in the long run, and will shut down if price is less than average variable cost. The correct option is d (do all of the above).

Step by step solution

Option a: Maximize profits by producing where MR = MC

This option states that a monopolistically competitive firm will maximize profits by producing where marginal revenue (MR) is equal to marginal cost (MC). This is true, as a monopolistically competitive firm will increase production if MR > MC, and decrease production if MR < MC, in order to maximize its profits. Therefore, the optimal production level will be attained when MR = MC.

Option b: Not earn an economic profit in the long run

In the long run, a monopolistically competitive firm will not earn an economic profit due to the entry and exit of firms in the market. This process will continue until the market reaches an equilibrium where the firm's profits are equal to its costs, making the economic profit equal to zero. Hence, this statement is also true.

Option c: Shut down if price is less than average variable cost

This option states that a monopolistically competitive firm will shut down if the price that it receives is less than its average variable cost. This is indeed true, as when the price is less than the average variable cost, the firm cannot cover its variable costs, and it's more beneficial for the firm to shut down and reduce its losses rather than continue production.

Option d: Do all of the above

Since we have analyzed each of the given options (a, b, and c) and found that all of them are valid statements about the behavior of a monopolistically competitive firm, option d (do all of the above) must be the correct choice. In conclusion, a monopolistically competitive firm will maximize profits by producing where MR = MC, will not earn an economic profit in the long run, and will shut down if price is less than average variable cost. The correct option is d (do all of the above).

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