Question

Joe's Juice Shop operates in a monopolistically competitive market. Joe's is currently producing where its average total cost is minimized. In the long run we would expect Joe's output to:_______.
a. increase and average total costs to decrease.
b. decrease and average total cost to decrease.
c. remain unchanged as Joe's is doing the best it can.
d. decrease and average total cost to increase.

Answer 1

Answer:

D) decrease and average total cost to increase.

Explanation:

A monopolistically competitive firm is not a monopoly, it operates in a market where there are many producers and consumers, but each producers supplies a differentiated product, e.g. restaurants.

The demand curve of a monopolistically competitive market is downward sloping. In the short run a firm can make economic profit by selling its goods at a higher price, but in the long run the demand curve will be tangent to the firm's average total cost. At this point the firm will no longer produce economic profit (not the same as accounting profit), similarly to what happens to firms that compete in perfectly competitive markets.