When a monopolistically competitive industry is in long-run equilibrium

Question

Quizplus · Accepted Answer

In the long-run equilibrium of monopolistically competitive industries, firms earn zero economic profit. This is because, in the long run, entry and exit of firms can occur, and firms will either enter the industry due to positive profits or exit the industry due to losses. As a result, firms will be left with normal profits or zero economic profit in the long run, where price will be equal to average total cost, which includes normal profit. Therefore, option B is correct. Option A is incorrect as firms do not earn economic profit in long-run equilibrium. Option C is incorrect as price may be higher than minimum average cost, and firms may not be able to produce at minimum average cost due to product differentiation. Option D is incorrect as long-run equilibrium might not necessarily mean that price will equal marginal cost.

When a Monopolistically Competitive Industry Is in Long-Run Equilibrium