Long-run equilibrium under monopolistic competition is similar to long-run equilibrium under perfect competition in that:
A) price equals the minimum average total cost.
B) firms face perfectly elastic demand curves.
C) price equals average cost.
D) marginal revenue equals average cost.

Question

Quizplus · Accepted Answer

Long-run equilibrium under monopolistic competition and perfect competition both occur where price equals average cost. This is because if price is lower than average cost, the firm will make a loss and eventually exit the market, and if price is higher than average cost, new firms will enter and drive down prices. Therefore, in the long run, both monopolistic and perfectly competitive firms will produce at the minimum efficient scale, where average total cost is minimized and price equals average cost. Choice A is incorrect because in monopolistic competition, firms have some market power and can charge a price higher than minimum average total cost. Choice B is incorrect because in monopolistic competition, firms face a downward-sloping demand curve and do not have perfectly elastic demand. Choice D is incorrect because in monopolistic competition, marginal revenue is less than price due to the downward-sloping demand curve.

Long-Run Equilibrium Under Monopolistic Competition Is Similar to Long-Run Equilibrium