In the long run, a monopolistically competitive firm will operate where P = AC and will no longer have economic profits.

Question

Quizplus · Accepted Answer

In the long run, firms in monopolistic competition will enter or exit the market until they reach a point where price (P) equals average cost (AC), which is where they make zero economic profit. This is because if a firm is making economic profits in the short run, new firms will have an incentive to enter the market, increasing competition and reducing profits. Similarly, if a firm is making losses, some firms will exit the market, reducing competition and increasing profits. In the long run, all firms in the market will end up operating where P = AC and earning zero economic profits.

In the Long Run, a Monopolistically Competitive Firm Will Operate