In monopolistic competition,a firm's demand curve is tangent to the ATC curve in the long run because
A)Barriers to entry are high.
B)Entry eliminates economic profit,and exit eliminates losses.
C)Advertising is ineffective in differentiating the product.
D)Producers are price takers.

Question

Quizplus · Accepted Answer

In the long run, barriers to entry are low in monopolistic competition, so new firms can easily enter the market, causing existing firms to lose market share and profits. As a result, firms in monopolistic competition cannot earn economic profit in the long run. However, firms can still earn a normal profit by producing where the demand curve is tangent to the ATC curve. At this point, the firm's price is equal to its average cost, so it is not making any profit, but it is also not making any losses. Therefore, the demand curve is tangent to the ATC curve in the long run because entry eliminates economic profit, and exit eliminates losses.

In Monopolistic Competition,a Firm's Demand Curve Is Tangent to the ATC