The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will:
A) produce the output level at which price equals long-run marginal cost.
B) operate at minimum long-run average cost.
C) overutilize its insufficient capacity.
D) produce the output level at which price equals long-run average cost.

Question

Quizplus · Accepted Answer

In the long run, a monopolistically competitive firm will produce the output level at which price equals long-run average cost. This is because firms in this market structure have some degree of market power and can charge a price above marginal cost, but there is also some level of competition that prevents them from charging a price too much above average cost. As firms adjust their production over time, they will eventually settle on the output level that allows them to earn normal profit, which occurs when price equals long-run average cost.

The Theory of Monopolistic Competition Predicts That in Long-Run Equilibrium