Multiple Choice
Which of the following is true of monopolistically competitive firms in long-run equilibrium?
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13. Monopolistic Competition
Characteristics of Monopolistic Competition
Multiple Choice
Which of the following is true for a monopolistically competitive firm in long-run equilibrium?
A
The firm produces where marginal cost is greater than marginal revenue.
B
The firm faces a perfectly elastic demand curve.
C
The firm earns zero economic profit.
D
The firm produces at the minimum point of its average total cost curve.
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 equilibrium, 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: Recognize that the firm produces where marginal cost (MC) equals marginal revenue (MR), but since the demand curve is downward sloping (not perfectly elastic), MC is less than price (P) and MR.
Step 4: Note that the demand curve faced by the firm is not perfectly elastic because of product differentiation; the firm has some market power and faces a downward sloping demand curve.
Step 5: Understand that the firm does not produce at the minimum point of its average total cost (ATC) curve in long-run equilibrium because excess capacity exists; the firm produces at a quantity where ATC is declining but not minimized.
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