What are characteristics of monopolistic competition? Choose two.

This statement is incorrect because, in the long run, firms in monopolistic competition will adjust their output and pricing to a point where price equals average total cost, resulting in zero economic profit. The presence of competition ensures that any short-term profits are eroded as new firms enter the market.

Firms in monopolistic competition do not operate at the efficient scale because they produce differentiated products and face downward-sloping demand curves. As a result, they typically produce at levels where average total cost is not minimized, leading to inefficiencies in resource allocation.

This statement is incorrect; when firms exit the market, the demand curve for the remaining firms actually shifts to the right. With fewer firms competing, the remaining firms can capture a larger share of the market, thus increasing the demand for their products.

In monopolistic competition, firms do not set price equal to marginal cost; instead, they set price above marginal cost due to product differentiation. This pricing strategy allows firms to earn positive economic profits in the short run, although in the long run, profits tend to dissipate as competition increases.