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 produce at the output level where marginal revenue equals marginal cost (MR=MC), which is QC in this case. However, because the firm faces a downward sloping demand curve, it will charge a price above marginal cost, which is PL. At this output level and price, the firm will only break even because the price is equal to the average total cost (ATC) at QL, which is the minimum point of the LRAC curve. Therefore, the best choice is D, which correctly states that the firm will maximize profit but only break even by producing at QL and charging price PL.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically