Exhibit 10-3 At the profit-maximizing output, the monopolistically competitive firm in Exhibit 10-3 is in
A)long-run equilibrium because price equals average total cost
B)long-run equilibrium because price is less than average total cost
C)short-run equilibrium because price is greater than average total cost
D)short-run equilibrium because there is an economic loss
E)short-run equilibrium because there is zero economic profit

Question

Exhibit 10-3  At the profit-maximizing output, the monopolistically competitive firm in Exhibit 10-3 is in
A)long-run equilibrium because price equals average total cost 
B)long-run equilibrium because price is less than average total cost 
C)short-run equilibrium because price is greater than average total cost 
D)short-run equilibrium because there is an economic loss 
E)short-run equilibrium because there is zero economic profit

Quizplus · Accepted Answer

In the short-run, the firm is in equilibrium because price (P) is greater than average variable cost (AVC), allowing the firm to cover its variable costs and contribute towards covering its fixed costs. However, in the long-run, due to the presence of free entry and exit, firms will enter the industry attracted by the profits, causing the demand curve facing each firm to shift leftward, decreasing the price and reducing economic profits to zero. At this point, firms are producing at their minimum average total cost (ATC) and are in long-run equilibrium. Therefore, since the question only asks about the output level, it is safe to assume that the choice that reflects the short-run equilibrium is the correct answer.

Exhibit 10-3 at the Profit-Maximizing Output, the Monopolistically Competitive