In the long-run equilibrium, a monopolistically competitive firm makes zero profit because:

Question

Quizplus · Accepted Answer

In the long-run equilibrium of monopolistic competition, firms are able to differentiate their products and create a certain degree of market power, allowing them to set prices above marginal cost. However, because there are many firms in the market, consumers have a variety of substitutes to choose from, which puts pressure on firms to keep prices reasonable. As a result, in the long-run equilibrium, firms will produce where marginal revenue equals marginal cost, but the price they charge will be lower than the price charged by a monopoly. Therefore, the firm will earn zero economic profit, which occurs when price equals average total cost. Choice D is the correct answer.

In the Long-Run Equilibrium, a Monopolistically Competitive Firm Makes Zero