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Figure: Monopolistic Competition
-(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect prices in this market to:
A) stay the same.
B) increase as unprofitable firms leave the industry.
C) decrease to the point that P = AC.
D) decrease to the point that P = MC.

Question

Use the following to answer questions:
Figure: Monopolistic Competition 
-(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect prices in this market to:
A) stay the same. 
B) increase as unprofitable firms leave the industry. 
C) decrease to the point that P = AC. 
D) decrease to the point that P = MC.

Quizplus · Accepted Answer

In the long run, firms in a monopolistic competitive market will experience entry and exit until they reach the point where they are earning zero economic profit. At that point, price will equal average total cost (P=AC) but may still be above marginal cost (P>MC) due to product differentiation. Therefore, we would expect prices in this market to decrease to the point where P=AC.

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