Figure 12-1

-In Figure 12-1, for a monopolistically competitive firm, long-run equilibrium can occur only at the quantity indicated by which point?
A)A
B)B
C)C

Question

Figure 12-1
 
-In Figure 12-1, for a monopolistically competitive firm, long-run equilibrium can occur only at the quantity indicated by which point?
A)A 
B)B 
C)C

Quizplus · Accepted Answer

In monopolistic competition, firms produce differentiated products, which makes them face a downward-sloping demand curve. In the long run, if firms are earning economic profit, other firms will enter the market, increasing competition and decreasing demand for each firm's product. This process will continue until each firm is earning zero economic profit, which occurs when price equals average total cost (ATC). The long-run equilibrium occurs at the quantity where the demand curve is tangent to the ATC curve, which corresponds to point C in the graph. At this point, the firm is producing the efficient quantity of output (where marginal cost equals marginal revenue) and charging a price that covers all of its costs. Points A, B, and D are not sustainable long-run equilibrium points because they either result in economic profit or losses, which will drive firms to enter or exit the market, respectively.

Figure 12-1 -In Figure 12-1, for a Monopolistically Competitive Firm, Long-Run Equilibrium