The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11-3
-Refer to Figure 11-3.In the long run,a monopolistically competitive firm will

Question

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11-3
-Refer to Figure 11-3.In the long run,a monopolistically competitive firm will

Quizplus · Accepted Answer

In the long-run, a monopolistically competitive firm will maximize profit but only break even by producing at the quantity where marginal revenue (MR) equals marginal cost (MC), which is Q1 and charging the price corresponding to the demand curve at that quantity, which is P1. At Q2 and P1, the firm would make a positive profit in the short-run, but in the long-run, other firms would enter the market, driving down demand and causing the firm's demand curve to shift leftward until it intersects with its LRAC curve at the break-even point. At Q1 and P2, the firm would be producing at a quantity where the marginal cost exceeds the marginal revenue, resulting in a loss. Maximizing profit and breaking even is the best choice for a monopolistically competitive firm in the long-run since it ensures that the firm is operating at the most efficient point on its long-run average cost curve.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically