Which of the following statements is true about firms in monopolistic competition in the short run?

• A. Firms can earn positive economic profits due to product differentiation.
• B. Firms face perfectly elastic demand curves for their products.
• C. Firms cannot influence the price of their products.
• D. Firms always produce at the minimum point of their average total cost curve.

Answer: (A)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: Firms sell differentiated products, have some control over price, and face downward-sloping demand curves.
2. Recall that in the short run, firms in monopolistic competition can earn positive economic profits because product differentiation allows them to have some market power.
3. Recognize that firms in monopolistic competition do NOT face perfectly elastic demand curves; instead, their demand curves are downward sloping due to product differentiation.
4. Note that firms can influence the price of their products because of product differentiation, so the statement that they cannot influence price is false.
5. Remember that firms in monopolistic competition do not necessarily produce at the minimum point of their average total cost curve in the short run; they often produce at a level where price exceeds marginal cost but not at minimum average total cost.