In long-run equilibrium in monopolistic competition,price is:
A)greater than average total cost.
B)equal to average total cost at an output below where average total cost is minimized.
C)equal to average total cost at its minimum.
D)equal to average total cost at an output above where average total cost is minimized.

Question

Quizplus · Accepted Answer

In the long-run equilibrium of monopolistic competition, firms make zero economic profit. This means that price will be equal to average total cost in the long run. However, since monopolistically competitive firms have a downward sloping demand curve, they must charge a price higher than marginal cost in order to cover their fixed costs and earn some level of profit in the short run. In the long run, firms will adjust their output and price until they are at the point where average total cost is minimized. Therefore, in the long run, price will be equal to average total cost at an output below where average total cost is minimized.

In Long-Run Equilibrium in Monopolistic Competition,price Is