Figure 12.1.1
-Refer to Figure 12.1.1 above. Which of the figures describes the long run equilibrium in a monopolistically competitive market?
A) The figure in panel (a).
B) The figure in panel (b).
C) Both figures.
D) Neither figure.

Question

Figure 12.1.1
-Refer to Figure 12.1.1 above. Which of the figures describes the long run equilibrium in a monopolistically competitive market?
A) The figure in panel (a). 
B) The figure in panel (b). 
C) Both figures. 
D) Neither figure.

Quizplus · Accepted Answer

In panel (a), the demand curve (D) and the long run average cost (LRAC) curve intersect where the LRAC is tangent to the demand curve, indicating that the firm is producing at the efficient scale with zero economic profit. This is the long run equilibrium outcome in a monopolistically competitive market. In contrast, panel (b) shows a situation where the firm is producing at an output level where the average total cost (ATC) is higher than the price (P), resulting in negative economic profit. Therefore, panel (a) is the only figure that describes the long run equilibrium in a monopolistically competitive market.

Figure 12.1.1 -Refer to Figure 12.1.1 Above. Which of the Figures Describes