Which of the following is correct?
A) A firm in monopolistic competition does not have excess capacity in the long run.
B) A firm in perfect competition operates at maximum average total cost in the long run.
C) In the long run, a firm in monopolistic competition maximizes its profit at a point where price is equal to average total cost but the average total cost is not minimized.
D) In the long run, a firm in monopolistic competition makes zero economic profit and its price is equal to the minimum average total cost.
E) In the long run, a firm in monopolistic competition can make an economic profit because of product differentiation.

Question

Quizplus · Accepted Answer

In the long run, a firm in monopolistic competition maximizes its profit at a point where price is equal to average total cost but the average total cost is not minimized. This is because firms in monopolistic competition differentiate their products, leading to a more elastic demand curve and some degree of market power. Therefore, they may charge a price higher than the marginal cost, but not enough to drive away all customers. The profits earned by the firm in the short run attract new firms to enter the market, which increases competition and reduces the price. Eventually, the price falls to the point where the firm earns only normal profit, which is equal to the minimum average total cost. However, since the firm incurs some cost for product differentiation, its average total cost may not be minimized at the profit-maximizing output level.

Which of the Following Is Correct