Which of the following is correct regarding the monopolistic competition model of trade we studied in class?

Question

BlackTom AI · Accepted Answer

Monopolistic competition features free entry and exit of firms, product differentiation, many sellers, and downward-sloping demand for each firm’s variety. 1) Relevant knowledge points and concepts - Market structure: monopolistic competition (Chamberlin–Dixit–Stiglitz framework) — many firms, differentiated products, some market power for each firm. - Short-run vs long-run: firms can earn positive profits short-run, but free entry/exit drives long-run profits to zero. - Profit condition: π = (P − AC)·Q; entry continues while π > 0 and exit occurs while π < 0. - Pricing: P > MC in equilibrium (markup over marginal cost), and P = AC in long-run equilibrium (zero economic profit). 2) Step-by-step reasoning - Each firm faces a downward-sloping demand for its product and chooses quantity to maximize profit, setting MR = MC and charging P > MC. - If incumbent firms are making positive economic profits (π > 0), this attracts entry because there are no barriers. New firms introduce close varieties, stealing some demand from incumbents and shifting each firm’s demand curve leftward (and making it more elastic). - As demand for each incumbent falls, price and quantity chosen fall, reducing π. Entry continues until profits are driven to zero. Conversely, if firms are making losses, some exit, shifting remaining firms’ demand rightward until losses vanish. - Algebraic intermediate steps: π = (P − AC)Q. If π > 0, number of firms N rises → demand for a given firm: D(P; N) shifts down → new P' and Q' satisfy (P' − AC')Q' = 0 in long run → P' = AC'. Thus free entry/exit ensures long-run zero economic profit. 3) Why the correct answer is correct - “Firms are free to enter and exit from the market” is a defining assumption of the monopolistic competition model; it is exactly this free entry/exit that generates zero long-run profits and determines the long-run equilibrium. 4) Why typical alternative statements would be incorrect - “Firms are price takers” is wrong: they have downward-sloping demand and set P > MC. - “Firms produce at minimum average cost” is wrong: firms operate with excess capacity (Q < Q_at_minAC), so they do not produce at the lowest point of AC. - “Firms earn persistent positive profits” is wrong: free entry eliminates persistent economic profits in the long run. Conclusion: The correct statement is “Firms are free to enter and exit from the market.” This matches the provided answer.

Which of the following is correct regarding the monopolistic competition model of trade we studied in class?单项选择题

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