Multiple Choice
Which of the following is a key difference between a monopolistically competitive firm and a perfectly competitive firm?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
Which of the following is true of a monopolistically competitive firm in long-run equilibrium?
A
It earns zero economic profit.
B
It faces a perfectly elastic demand curve.
C
It produces at the minimum point of its average total cost curve.
D
It is a price taker.
Verified step by step guidance1
Step 1: Understand the characteristics of a monopolistically competitive firm in the long run. Such firms have many competitors, product differentiation, and free entry and exit in the market.
Step 2: Recall that in the long run, free entry and exit drive economic profits to zero. This means the firm earns zero economic profit, where total revenue equals total cost including opportunity costs.
Step 3: Analyze the demand curve faced by the firm. Unlike a perfectly competitive firm, a monopolistically competitive firm faces a downward-sloping demand curve, not a perfectly elastic one.
Step 4: Consider the firm's production point. In long-run equilibrium, the firm does not produce at the minimum point of its average total cost (ATC) curve because it has some excess capacity due to product differentiation.
Step 5: Recognize that the firm is not a price taker because it has some market power to set prices above marginal cost due to product differentiation, unlike firms in perfect competition.
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