Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Price is equal to marginal cost
B
Price is greater than marginal cost
C
Price is less than marginal cost
D
Price equals average total cost
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, firms have some control over their prices because they sell products that are similar but not identical. This means that the price they charge is usually higher than the marginal cost, which is the cost of producing one more unit of their product. For example, if a coffee shop sells a unique blend of coffee for $5 a cup, but it only costs them $3 to make each cup, the price is above the marginal cost. This situation occurs because firms want to maximize their profits, and they can set prices above marginal costs due to product differentiation. Overall, in this market structure, the price is greater than the marginal cost, leading to a profit for the firms.
Detailed Explanation
In this type of market, firms have some control over their prices. Other options are incorrect because Some might think price equals marginal cost, but that's not true here; Thinking price is less than marginal cost is a common mistake.
Key Concepts
market power
Topic
Monopolistic Competition Analysis
Difficulty
easy level question
Cognitive Level
understand
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