Figure 11-2 Profit Maximization for a Firm in Monopolistic
Competition
Predictions of the Theory
Product differentiation, which is the only thing that makes monopolistic
competition different from perfect competition, has important
consequences for behaviour in both the short and the long run.
The Short-Run Decision of the Firm
In the short run, a firm that is operating in a monopolistically competitive
market structure is similar to a monopoly. It faces a negatively sloped
demand curve and maximizes its profits by choosing its level of output
such that marginal costs equal marginal revenue. The firm shown in part
(i) of Figure 11-2 makes positive economic profits, although in the short
run it is possible for a monopolistically competitive firm to break even or
even to make losses.