When a monopolistically competitive firm is in long-run equilibrium,
A) P = MC = ATC.
B) MR = MC and minimum ATC P.
C) MR MC and P = minimum ATC.
D) MR = MC and P minimum ATC.

Question

When a monopolistically competitive firm is in long-run equilibrium,
A) P = MC = ATC.
B) MR = MC and minimum ATC > P.
C) MR > MC and P = minimum ATC.
D) MR = MC and P > minimum ATC.

Quizplus · Accepted Answer

In monopolistically competitive markets, firms have some market power, which means they can charge a price above their marginal cost to earn a positive profit. However, in the long run, other firms may enter the market and offer close substitutes, eroding the monopolistic power of existing firms. In the long-run equilibrium, a monopolistically competitive firm will produce where marginal revenue (MR) equals marginal cost (MC), which ensures that it is maximizing profit. The firm will charge a price (P) greater than its marginal cost (MC), but it will not be able to charge a price higher than its average total cost (ATC) since new firms can enter and offer similar products. Thus, the long-run equilibrium for a monopolistically competitive firm requires that P is greater than minimum ATC (i.e., making a positive profit), but MR must be equal to MC to maximize profits. Therefore, Choice D, MR = MC and P > minimum ATC, is the best choice.

When a Monopolistically Competitive Firm Is in Long-Run Equilibrium