Long-run equilibrium under monopolistic competition requires that
A)the demand curve intersects the average cost curve.
B)the demand curve be tangent to the average cost curve.
C)price be equal to marginal cost.
D)quantity produced be at the point where average cost is at a minimum.

Question

Quizplus · Accepted Answer

In the long-run equilibrium under monopolistic competition, the demand curve must be tangent to the average cost curve. This is because firms in monopolistic competition have some degree of market power and can charge a price above their average cost. However, if they charge a price too high, new firms will enter the market, eroding their market power. Therefore, firms in monopolistic competition aim to produce at the point where marginal revenue equals marginal cost, but the price they charge will be higher than the average cost. In the long-run, the entry of new firms will drive profit to zero, but firms will continue to operate as long as their price is above the average cost. When the demand curve is tangent to the average cost curve, firms are producing at the minimum point on their average cost curve and are producing at the most efficient scale.

Long-Run Equilibrium Under Monopolistic Competition Requires That