Which of the following is true regarding the long run for a firm in monopolistic competition?

Question

Quizplus · Accepted Answer

In the long run, a firm in monopolistic competition earns zero economic profits, which means that its price equals its average total cost (P = ATC). This is because firms can enter or exit the market freely in the long run, so if a firm earns economic profits, new firms will enter the market and compete away those profits, causing the demand curve for the existing firm to shift left and the price to decrease. Therefore, in the long run, a firm in monopolistic competition will charge a price that covers its average total cost but not necessarily its marginal cost (as in perfect competition), so P ≠ MC. Similarly, the firm will not be able to maximize profits by setting MC = MR, because its demand curve is downward sloping (unlike in perfect competition), so MR ≠ P.

Which of the Following Is True Regarding the Long Run