If a monopolistically competitive industry is in long- run equilibrium, then for each firm

Question

Quizplus · Accepted Answer

In long-run equilibrium, a monopolistically competitive firm produces where its marginal revenue equals its marginal cost, as in perfect competition. However, due to product differentiation, the firm's demand curve will be downward sloping and not perfectly elastic. Therefore, the firm will produce where the demand curve is tangent to the long-run average cost curve, which represents the minimum efficient scale of production for the firm. This is the point where the firm is producing at the lowest possible cost while still satisfying consumer demand, resulting in zero economic profits in the long run. Hence, the answer is E, as the demand curve is tangent to its LRAC curve at this point.

If a Monopolistically Competitive Industry Is in Long- Run Equilibrium