Below is a graphical illustration of a typical firm operating in a monopolistically competitive industry:

-Refer to the graph above to answer this question.Which of the following statements is correct?

Question

Below is a graphical illustration of a typical firm operating in a monopolistically competitive industry:
 
-Refer to the graph above to answer this question.Which of the following statements is correct?

Quizplus · Accepted Answer

The graph illustrates a monopolistically competitive firm in the short run. The firm is making economic profits in the short run (where P > ATC), but is not producing at the efficient scale (where MC = ATC). Therefore, in the long run, new firms will enter the industry, increasing competition and driving down demand for the original firm's product. The demand curve will shift left, and the firm will eventually produce at the efficient scale (where MC = ATC) and price will decrease to the point where economic profits are zero. Therefore, the correct answer is C, as the firm will have to reduce production in the long run to eliminate economic profits and reach the efficient scale.

Below Is a Graphical Illustration of a Typical Firm Operating