In the long run, a firm in a monopolistically competitive market earns zero economic profit because

Question

BlackTom AI · Accepted Answer

In monopolistic competition long-run equilibrium occurs where marginal revenue equals marginal cost and price equals average total cost.

Relevant concepts: monopolistic competition features many firms, product differentiation, a downward-sloping demand curve for each firm, and free entry and exit. Profit maximization for any firm requires choosing output where MR = MC. Economic profit (positive or negative) induces entry or exit, shifting each firm’s demand until profits are zero in the long run.

Step-by-step reasoning:
1. Profit-maximizing rule: a firm produces quantity Q* where MR = MC. This determines the output level given the demand curve.
2. Profit per unit = P – ATC at Q*. Total economic profit = (P – ATC) × Q*. If P > ATC at Q*, the firm earns positive economic profit; if P < ATC, it incurs a loss.
3. Free entry: if firms earn positive profits, new firms enter the market. Entry reduces demand faced by each existing firm (the demand curve shifts left and becomes more elastic) until profits are driven to zero.
4. Zero economic profit implies (P – ATC) = 0 at the profit-maximizing Q*, so P = ATC. Combine with MR = MC at that Q* and you have the long-run condition MR = MC and P = ATC.

Calculation/identity shown:
Total profit = (P – ATC) × Q = 0 ⇒ P – ATC = 0 ⇒ P = ATC.
Profit maximization gives MR = MC. Both conditions together define the long-run equilibrium.

Why the correct answer is correct: MR = MC determines the optimal output; P = ATC results from free entry forcing zero economic profit. Graphically, the firm’s demand curve is tangent to its ATC at the chosen Q where MR (below demand) intersects MC.

Why other options are incorrect:
- “MR = price and ATC” is false because for a downward-sloping demand MR < P (unlike perfect competition).
- “Price = MC and ATC” describes perfect competition (allocative efficiency), not monopolistic competition.
- “MR = ATC and price = MC” is inconsistent with profit-maximization and the typical markup pricing of monopolistic competition.

Therefore the correct choice is: marginal revenue is equal to marginal cost and price is equal to average total cost. This matches the provided answer.

In the long run, a firm in a monopolistically competitive market earns zero economic profit becauseSingle choice

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