Question

In the short-run, a firm under monopolistic competition earns abnormal profit because _________________.

• A. other firms are not in a position to bring out closely similar product in that period
• B. it charges a lower price
• C. it charges a higher price
• D. the demand curves are elastic

Answer 1

Answer: (A)

other firms are not in a position to bring out closely similar product in that period

In a monopolistic market, the products are highly differentiated and firms have freedom of entry and exit. In the short term, it is difficult for another firm to come out with a similar product because of the high differentiation, and they can earn super normal profits till then.