Question

When a monopolistically competitive firm is in long-run equilibrium, a. marginal revenue is equal to marginal cost. b. average total cost is minimized. c. marginal revenue is tangent to average total cost.

Answer 1

Answer:

a. marginal revenue is equal to marginal cost.

Explanation:

Monopolistic competition can be defined as an imperfect competition where many producers or organizations sell differentiated products that are not perfect substitutes. Examples of firms or organizations engaging in a monopolistic competition are restaurants, shoes, clothing lines etc.

Generally, a monopolistic competitive market is characterized by the presence of large numbers of firm (producers) and a very low entry barrier.

Hence, in a monopolistic competition, firms have a degree of control over price, make independent decisions and can freely enter or exit the market in the long-run. Therefore, these firms combine elements of both monopoly and competition.

When a monopolistically competitive firm is in long-run equilibrium marginal revenue is equal to marginal cost $(MR = MC)$. This ultimately implies that in the long-run, firms engaging in monopolistic competitive market are often going to manufacture the quantity of goods where the marginal cost (MC) curve intersect with the marginal revenue (MR). Also, the price set would be greater than the minimum average total cost (ATC).

Thus, a monopolistic competitive producer has a highly elastic demand curve and firms would eventually break even in the long-run.