In competitive markets, price is equal to marginal cost in the long run. In monopolistic competition, why is price greater than marginal cost in the long run? Group of answer choices Both markets can charge more than marginal cost in the long run because products are differentiated in both markets. Price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost. The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.

Question

Business

Regan Santos

16 July, 01:27

In competitive markets, price is equal to marginal cost in the long run. In monopolistic competition, why is price greater than marginal cost in the long run? Group of answer choices Both markets can charge more than marginal cost in the long run because products are differentiated in both markets. Price is driven to marginal cost in both competitive markets and markets that are monopolistically competitive. Products are identical in perfectly competitive markets, so a firm must charge less than marginal cost in order to differentiate itself. This is not true in monopolistically competitive markets where firms can charge more than marginal cost. The demand curves for the two types of firms are different. Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.

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Amor · Answer 1

The correct answer is the last option: Monopolistically competitive firms have market power and a downward sloping demand curve, so they set a price higher than marginal cost.

Explanation:

On the one hand, a perfect competitive market is characterized by the fact that it is a market where there are a lot of producers and they produce the same good so there is no differentiation and for that reason they can not charge what they want to the price but the market in its whole makes that decision and that is why at the long run the price equals the marginal cost establishing that there ir no interest for firms to enter or exit the industry.

On the other hand, a monopolistic competitive market is characterized by the fact that there are also a lot of producers that produce similar goods but they can charge a higer price to everyone of their products due to the fact that they are differentiated by the brands and their customer's loyalty and therefore that they have market power and at the long run when facing a downward sloping demand curve, they can set a price higher that marginal cost.