Question

Advanced Printing Systems is a firm in a monopolistically competitive market. If it is selling its product at $11 at the equilibrium quantity and earning normal profit, what is its long-run average total cost?

Answer 1

Answer:

The long-run average total cost will be $11.

Explanation:

A monopolistic firm earns a normal profit in the long run. Equilibrium is achieved at the point where the marginal revenue curve is intersected by the marginal cost curve. The equilibrium output level is determined by this intersection.

The price is fixed higher than the marginal cost, the price is equal to the average total cost. This is because if the price is higher the existing firms will be having profits. This will attract potential firms in the market. The entry of new firms will lead to an increase in supply. As a result, the price will decline. This process will continue until the price level becomes equal to the average total cost and all profits are exhausted.

So, here if the price of the product is $11 and the firm is enjoying normal profits, the average total cost will also be $11.