The correct answer is: A. Firms produce homogeneous goods
In a perfectly competitive market, there are many firms producing identical goods. This means that each firm has a small share of the market and cannot influence the market price. As a result, firms in a perfectly competitive market must accept the market price and produce at the point where marginal cost equals marginal revenue.
In a monopolistically competitive market, there are a large number of firms producing similar but not identical goods. This means that each firm has a somewhat larger share of the market than a firm in a perfectly competitive market, but it still cannot influence the market price. As a result, firms in a monopolistically competitive market must also accept the market price and produce at the point where marginal cost equals marginal revenue.
However, there are some key differences between perfectly competitive markets and monopolistically competitive markets. In a perfectly competitive market, there are no barriers to entry or exit, meaning that firms can easily enter or exit the market. This means that there is a constant threat of new firms entering the market, which puts downward pressure on prices and profits. In a monopolistically competitive market, there are some barriers to entry, which means that it is not as easy for firms to enter or exit the market. This means that firms in a monopolistically competitive market have some degree of market power, which allows them to charge a price above marginal cost.
Option B is incorrect because prices are not equal to marginal cost in a monopolistically competitive market. As explained above, firms in a monopolistically competitive market must accept the market price, which is above marginal cost.
Option C is incorrect because long-run profits are not zero in a monopolistically competitive market. As explained above, firms in a monopolistically competitive market have some degree of market power, which allows them to charge a price above marginal cost. This means that firms in a monopolistically competitive market can earn positive profits in the long run.
Option D is incorrect because prices are not above marginal cost in the long run in a monopolistically competitive market. As explained above, firms in a monopolistically competitive market must accept the market price, which is above marginal cost. However, the market price will eventually fall to the level of marginal cost in the long run as new firms enter the market.