- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 13. The Firm and Market Structures
- Subject 3. Monopolistic Competition

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**CFA Practice Question**

The monopolistically competitive industry produces an output at which ______

A. price equals average total cost but exceeds marginal cost.

B. price equals average total cost but is less than marginal cost.

C. price equals marginal cost but exceeds average total cost.

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**User Contributed Comments**
13

User |
Comment |
---|---|

cswin |
? should it be exceeding mc and ATC? |

nike |
no cswin. note it's not the competitive industry! |

pdubyac |
This is assumed to be in the short-run, otherwise it would be at ATC. |

mishis |
S-Run: produces output at which MC = MR and charges corresponding P on the demand curve. ATC is below. at this point, P > MC because monopolistic competitors charge a markup. , Econ Profit>0 L-Run: Other firms steal mkt share - firm's demand decreases - Price is still greater than MR but at lowest point in ATC curve. Profit = 0 |

mishis |
Only in Perfect competition Price = MC, a condition for efficient production which is not the case in monopolistic competition. C is wrong. |

khanhlinhdao |
No mishis! In any markets a producer will produce until Marginal Benefit = Marginal cost! As nike pointed out this is not perfect competition, even in the long run. The producer produces until marginal benefit (price) = MC but it is still > ATC so it makes a profit. |

kocas |
khanlinhdao: monopolistic competitors do not take a price where P=MR=MC. they take P=MR+Markup=MC+Markup. selling price is equal to marginal cost only in perfect competition. |

YOUCANDOIT |
khanlinhdao: in the long run, a monopolistic firm NEVER earns an economic profit (=0) since price is tangent to the ATC curve....this is b/c new firms enter into industry and shift the firm's d-curve down (leftward) until it is tangent to the ATC curve. |

challenge10 |
mishis is right the answer should be A since this is a competitive market and hence economic profit would be equal to 0. Hence price would be the point at which the demand curve is tangent to ATC. Only at the minimum efficient scale ie. lowest point on ATC would the price be equal to MC. |

alles |
answer is A. In monopolistic competition P > MC (MC=MR). And P > ATC in the short-run and P=ATC in the long-run. This questions is not about monopolistic competition (as it states) in the short-run (where A would be the right answer), but rather it's about perfect competition in short-run (where only then C would be the right answer). |

farhan92 |
Think there should be a way of contacting Analyst Notes to provide clarification on why they have chose a certain answer over another |

Lambo83 |
Alles is correct. The MR slope is twice as steep as the demand curve so MC will equal MR below price. So price must exceed MC. Answer C is definitely correct |

Dabuya |
The answer is C. The price is always equal to the marginal cost. Always. Since it is a monopolistically competitive industry, there is a little profit, so the price is always higher than the average total cost. |