If the ice cream industry is monopolistically competitive,then:
A) the price of ice cream equals marginal cost in equilibrium.
B) the price of ice cream equals average cost in long-run equilibrium.
C) the price of ice cream is less than marginal cost in equilibrium.
D) there are significant barriers to entering the ice cream business.

Question

Quizplus · Accepted Answer

In long-run equilibrium in a monopolistically competitive industry, the price equals the average cost. This is because firms have some degree of market power to set prices above marginal cost, but they also face competition from other firms producing similar products, which limits their ability to set prices too high. In the long run, firms will enter or exit the industry until profits are driven to zero, which means that price equals average cost. This is different from a perfectly competitive industry, where price equals marginal cost in both short and long run equilibrium.

If the Ice Cream Industry Is Monopolistically Competitive,then