Question

a Monopolistic Competitor can protect its economic profits in the Long Run by:

A. using Game theory to repond to its rivals’ business decisions.

B. Creating high barriers to entry

C. Charging a market price that is below the prices charged by its competitors.

D. Continuing to 1) differentiate its product and, 2) seek out all opportunities to reduce Average Total Costs.

E. Making sure to always set MR = MC

F. None of the above.

Answer 1

Option D. Continuing to 1) differentiate its product and, 2) seek out all opportunities to reduce Average Total Costs.

Explanation: The long-run average cost curve of a monopolistic firm becomes tangent to the demand curve at the profit-maximizing price. This is because the firm experiences rising average total cost and falling demand. Therefore, in the long-term, a monopolistic firm does not earn an economic profit. It can earn economic profit in the long-term by differentiating products which will increase demand and by seeking all opportunities to reduce average total cost.