Which of the following is true of a monopolisti-cally competitive firm in long-run equilibrium?

Question

BlackTom AI · Accepted Answer

To approach this question, we first recall what characterizes a monopolistically competitive firm in the long run. In such markets, firms differentiate their products and face downward-sloping demand, so they maximize profit where marginal revenue equals marginal cost (MR = MC). However, because there is freedom of entry and exit, economic profits tend to be driven to zero in the long run, which implies price equals average total cost (P = ATC).

Option 1: 'Price equals marginal cost and average total cost.' This is incorrect because, in monopolistic competition, price typically exceeds marginal cost due to the downward-sloping demand faced by each differentiated firm. P = MC would suggest a pricing condition more aligned with perfect competition.

Option 2: 'The firm makes no attempt to differentiate its products.' This is false by the very definition of monopolistic competition, where product differentiation is the core feature that gives firms some market power and a downward-sloping demand curve for each firm.

Option 3: 'Price equals average total cost but is greater than marginal cost.' This matches the standard long-run equilibrium outcome for monopolistic competition: zero economic profit implies P = ATC, and because the firm faces a downward-sloping demand and sets MR = MC, we typically have P > MC. This reflects the presence of excess capacity and the markup over MC.

Option 4: 'The firm earns positive economic profits by producing at minimum average cost.' This is inconsistent with the long-run equal-profit condition in monopolistic competition, where profits are driven to zero, and ATC is not necessarily minimized by the firm’s output in the long run.

Option 5: 'Price equals marginal cost and is greater than average total cost.' This cannot occur because if P = MC and P > ATC, profits would be positive and the no-entry condition would be violated; in the long run, profits are driven to zero.

Which of the following is true of a monopolisti-cally competitive firm in long-run equilibrium?Single choice

Similar Questions

In a market with________, many firms are providing differentiated products.

Which of the following products is least likely to be sold in a monopolistically competitive market?

The diagram below shows the marginal cost (MC), average cost (AC), and demand curve faced by a representative firm in a monopolistically competitive market. Which one of the following statements is TRUE?

The diagram below shows the marginal cost (MC), average cost (AC), and demand curve faced by a representative firm in a monopolistically competitive market. Which one of the following statements is TRUE?

2. In the short-run, a profit-maximizing monopolistically competitive firm sets it price: A. equal to marginal revenue. B. equal to marginal cost. C. above marginal cost. D. below marginal cost.

19 A firm in a monopolistically competitive market that does not continue to innovate is likely to: A. become more efficient B. earn a normal profit C. earn positive economic profits D. see its demand curve become more inelastic

Unlike a firm in a perfectly competitive market, a firm in a monopolistically competitive market: A. can charge a price higher than ATC in the long run B. can charge a price higher than MC in the long run C. is not constrained by the demand curve, only by MR D. makes a normal profit in the long run

13 A firm in a monopolistically competitive market is most like a: A. Big fish in a small pond B. Shark in a tank C. Small fish in a big pond D. Small fish in a small pond

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler