Hello everyone,

I have a question on RBC model with monopolistic competition. All the textbook material about RBC model I have seen assumes a perfect competition market where the general price level is normalized to 1.

While with monopolistic competition, you have one more variable: marginal cost (MC), so what is the additional first-order condition should I add to the model?

I guessed that the condition should be p = markup* MC, but it seems not correct. If the price p is normalized to 1, then MC would be constant over time. But this is weird since a positive TFP shock should drive down the MC.

Thanks!