Figure 13-1

In Figure 13-1, 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 13-1 ​

In Figure 13-1, 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 monopolistically competitive markets, firms differentiate their products from competitors through branding, packaging, and other non-price factors, causing a downward sloping demand curve. In the short run, a firm in this market can earn positive profits by charging a markup over its marginal cost. As other firms observe positive profits, they will enter the market, increasing the supply of differentiated products and reducing the demand for any one firm's product. This will cause the firm's demand curve to shift leftward and become more elastic, reducing its markup and profits.

In the long run, if there are no barriers to entry, firms will enter and exit until they are earning zero economic profits, which occurs where the firm's demand curve is tangent to its long-run average cost curve (LRAC). This tangency point is where the firm is producing at minimum efficient scale and no excess capacity, indicated by point C in the diagram. Point A represents a situation where the firm is making positive economic profits in the short run, but this is unsustainable in the long run as entry erodes the demand for its product. Points B and D both represent situations where the firm is producing above minimum efficient scale and facing excess capacity, which is not sustainable in the long run as it leads to higher costs and lower profits.

Figure 13-1 ​ In Figure 13-1, for a Monopolistically Competitive Firm, Long-Run Equilibrium

Figure 13-1 In Figure 13-1, for a Monopolistically Competitive Firm, Long-Run Equilibrium