Question

Consider the statements I and II in a monopolistically competitive market scenario:
I. In the long-run equilibrium, the price of the good will be equal to the minimum of the average total cost.
II. In the short run, firms may earn a positive profit.
Which of the following options is CORRECT?

• A. Both I and II are TRUE
• B. I is TRUE but II is FALSE
• C. I is FALSE but II is TRUE
• D. Both I and II are FALSE

Hint:

In the short run, firms in monopolistic competition can earn profits, but in the long run, the price equals average total cost, though not necessarily at the minimum of the ATC curve.

Answer 1

The Correct Option is C

Step 1: Understand monopolistic competition.
In monopolistic competition, firms sell differentiated products, and there is free entry and exit in the long run. In the long-run equilibrium, firms produce at a point where price equals average total cost, but the price may not necessarily be at the minimum of the average total cost curve.
Step 2: Analyze the statements.
- Statement I is incorrect. In the long-run equilibrium, the price in a monopolistically competitive market equals average total cost, but it is not necessarily at the minimum of the ATC curve. Firms can operate at an inefficient point on the ATC curve.
- Statement II is correct. In the short run, firms in monopolistic competition can earn positive profits due to product differentiation and pricing power, but this will not last in the long run as firms enter the market.
Final Answer: \[ \boxed{\text{I is FALSE but II is TRUE}} \]