Which statement accurately describes the production scale and pricing behavior of firms in a monopolistically competitive market?

Show Answers

They operate at the optimal scale and set prices equal to marginal cost.They produce at optimal scale but price their products above marginal cost.They operate with excess capacity and price their goods higher than marginal cost.They have excess capacity and set prices equal to marginal cost.They produce at minimum average cost and charge prices equal to average cost.

Explanation

Monopolistically competitive firms typically do not produce at the efficient scale; instead, they operate with excess capacity. Additionally, they set prices above marginal cost due to product differentiation and downward-sloping demand curves, resulting in a markup over marginal cost.