Question

In a monopolistically competitive market, which statement(s) is/are correct in comparison to both a competitive market and a monopoly?

a. 0 firms in all three market structures maximize profit by producing an output level where marginal revenue equals marginal cost.

b. 0 firms in all three market structures produce the welfare-maximizing level of output.

c. All of the above are correct.

Answer 1

In a monopolistically competitive market, statement 'a' is correct, but statement 'b' is not.

Step-by-step explanation:

In a monopolistically competitive market, statement 'a' is correct in comparison to both a competitive market and a monopoly. In monopolistically competitive markets, firms maximize profit by producing an output level where marginal revenue equals marginal cost, just like in competitive markets. However, statement 'b' is not correct. In a monopolistically competitive market, the welfare-maximizing level of output is not achieved because price is higher than marginal cost, which leads to a lower quantity of production and a higher price compared to a perfectly competitive market.