Assuming identical production functions and cost curves, the long-run equilibrium of a monopolistically competitive firm, as compared with a perfectly competitive firm, is such that, for the former, price is:
A) higher and output is greater.
B) higher and output is smaller.
C) lower and output is greater.
D) lower and output is smaller.

Question

Quizplus · Accepted Answer

In the long run, monopolistically competitive firms earn zero economic profit, but they have some market power to charge a price above their marginal cost. Therefore, in comparison to a perfectly competitive firm, a monopolistically competitive firm will have a higher price. However, due to the presence of close substitutes and competition, the monopolistically competitive firm cannot charge a price as high as a pure monopoly. Therefore, the monopolistically competitive firm will have a smaller output level in comparison to a perfectly competitive firm which charges a lower price and produces a higher output level.

Assuming Identical Production Functions and Cost Curves, the Long-Run Equilibrium