Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect price in this market to:
A) stay the same.
B) increase as unprofitable firms leave the industry.
C) decrease to the point that P = AC.
D) decrease to the point that P = MC.

Question

Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect price in this market to:
A) stay the same. 
B) increase as unprofitable firms leave the industry. 
C) decrease to the point that P = AC. 
D) decrease to the point that P = MC.

Quizplus · Accepted Answer

In the long run, firms in a monopolistic competitive market will enter and exit until each firm earns zero economic profit. This means that the price will eventually decrease to the point where it equals the average total cost (AC) of the firm. Thus, the correct choice is C.

Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the Figure