Question

Which of the following are correct in the context of monopolistic competition? 

(A) Monopolistic competitive firms may earn economic profits or incur losses in the short-run. 
(B) The long-run equilibrium position of a monopolistically competitive producer is far more efficient than that of pure competition. 
(C) The firms may strive to increase the demand for its product through product development and advertising. 
(D) Consumers benefit from the wide variety of product choices that monopolistic competition provides. 
Choose the correct answer from the options given below:
 

• A. (A), (C) and (D) only
• B. (A), (B) and (D) only
• C. (A), (B), (C) and (D)
• D. (A), (B) and (C) only

Hint:

Monopolistic competition provides consumers with variety, but firms may not achieve long-run efficiency.

Answer 1

The Correct Option is A

Step 1: Understand monopolistic competition.
Monopolistic competition refers to a market structure where many firms sell similar but not identical products. In the short-run, firms may earn profits or incur losses, but in the long-run, they tend to break even. Consumers benefit from variety in the products offered by these firms.

Step 2: Analysis of options.
- (A) Monopolistic competitive firms may earn economic profits or incur losses in the short-run: This is correct. In the short-run, firms can make profits or losses due to product differentiation.
- (B) The long-run equilibrium position of a monopolistically competitive producer is far more efficient than that of pure competition: This is incorrect. In the long-run, monopolistic competition tends to be less efficient than perfect competition due to excess capacity.
- (C) The firms may strive to increase the demand for its product through product development and advertising: This is correct. Firms in monopolistic competition focus on differentiation and often use advertising and product development to increase demand.
- (D) Consumers benefit from the wide variety of product choices that monopolistic competition provides: This is correct. One of the key features of monopolistic competition is the availability of diverse products to consumers.

Step 3: Conclusion.
The correct answer is (A), (C), and (D) only, as they correctly describe the behavior of firms in monopolistic competition.