Suppose that a profit-maximising firm in a monopolistically competitive market is at long-run equilibrium, then:

Question

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In a monopolistically competitive market, the firm maximizes profit by producing at the point where marginal revenue (MR) equals marginal cost (MC). However, because the firm faces a downward sloping demand curve, it sets a price higher than marginal cost to capture some market power. In the long run, entry of new firms drives profits to zero, and the demand curve becomes tangential to the average cost curve. At this point, the price is equal to the minimum average total cost, but still higher than marginal cost, so C is the correct answer. A is incorrect because a unitary elastic demand curve would suggest that the firm has no market power. B is incorrect because average revenue is equal to price in a monopolistically competitive market. D is incorrect because if marginal revenue were greater than marginal cost, the firm could increase profit by increasing output, which contradicts the long-run equilibrium assumption.

Suppose That a Profit-Maximising Firm in a Monopolistically Competitive Market