Question

In the short run, a monopolistically competitive firm will choose an output such that:

Answer 1

Answer:

MR =MC

P > MC

The industry will not be efficient.

In that order.

Explanation:

Just like in a monopoly, a monopolistically competitive firm always aims to produce at the profit maximizing level. This stays the same in long run and in the short run, this is where , Marginal revenue = Marginal Costs.

The price is set such that it is above average total costs and marginal costs, this results in an economic profit. Thus prices are usually set P > MC.

The prices are also greater than ATC and in the long run these prices equal the ATC while still remaining slightly above the MC curve if the product differentiation is successful.

When this happens, the industry is not efficient in the short run.

Hope that helps.