The following figure depicts four different market situations.

-Refer to the figure above.Which of the four market situations depicts a monopolistically competitive firm in the long run?

Question

The following figure depicts four different market situations.
 
-Refer to the figure above.Which of the four market situations depicts a monopolistically competitive firm in the long run?

Quizplus · Accepted Answer

Situation 2 shows a monopolistically competitive market in the long run. This is because the firm produces a differentiated product and has some market power to set prices, but there are still entry barriers and opportunities for new firms to enter the market and compete. In the long run, economic profits are driven to zero as firms enter and exit until only normal profits remain. This is reflected in the diagram by the firm's demand curve being tangent to its long-run average cost curve at the profit-maximizing quantity. Situations 1, 3, and 4 do not depict monopolistic competition in the long run.

The Following Figure Depicts Four Different Market Situations