Which of the following is true about a monopolistically competitive firm?

• A. It is the sole producer of a product with no close substitutes.
• B. It can earn long-run economic profits due to high barriers to entry.
• C. It faces a downward-sloping demand curve.
• D. It produces at the minimum point of its average total cost curve in the long run.

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive firm: it operates in a market with many sellers offering differentiated products, and there are no significant barriers to entry or exit.
2. Recall that because products are differentiated, a monopolistically competitive firm faces a downward-sloping demand curve, meaning it has some market power to set prices above marginal cost.
3. Recognize that unlike a pure monopoly, the firm is not the sole producer of the product, so the first statement is false.
4. Consider the long-run equilibrium: free entry and exit drive economic profits to zero, so the firm cannot earn long-run economic profits due to high barriers to entry; thus, the second statement is false.
5. Note that in the long run, the firm does not produce at the minimum point of its average total cost curve because it has excess capacity; therefore, the last statement is false.