Exhibit 10-2 A monopolistic competitive firm

Comparing the firms in a monopolistic competitive industry shown in Exhibit 10-2 to a perfectly competitive firm in long-run equilibrium, we find that both firms
A) choose a price equal to the marginal cost at the profit-maximizing quantity.
B) will experience entry of new firms into the industry.
C) earn zero economic profits.
D) minimize cost per unit at their profit-maximizing quantity.

Question

Exhibit 10-2 A monopolistic competitive firm

Comparing the firms in a monopolistic competitive industry shown in Exhibit 10-2 to a perfectly competitive firm in long-run equilibrium, we find that both firms
A) choose a price equal to the marginal cost at the profit-maximizing quantity. 
B) will experience entry of new firms into the industry. 
C) earn zero economic profits. 
D) minimize cost per unit at their profit-maximizing quantity.

Quizplus · Accepted Answer

In long-run equilibrium, both the monopolistic competitive firm and perfectly competitive firm will earn zero economic profits. However, the monopolistic competitive firm will not choose a price equal to marginal cost and may have fewer competitors entering the industry due to product differentiation. Therefore, the correct choice is C.

Exhibit 10-2 a Monopolistic Competitive Firm