Question

The fact that monopolistically competitive firms charge a price that exceeds marginal cost is responsible for the a. business-stealing externality that is observed in monopolistically competitive markets. b. product-variety externality that is observed in monopolistically competitive markets. c. inefficiencies of the long-term losses earned by monopolistically competitive firms. d. persistence of positive profits into the long run for monopolistically competitive firms.

Answer 1

The correct answer is option a.

Step-by-step explanation:

A monopolistic competition is the type of market structure were there are a number of firms who are supplying close substitutes. The barrier on entry of new firms and exit of existing firms is low. The firms face a downward sloping demand curve.

The monopolistic firms keep their prices higher than marginal cost because there is low barrier on entry, so other firms enter the market attracted by super normal profits.

Business stealing externality is involved because new firms increase supply and thus reduce price level and profits.