Which of the following is true of a monopolisti-cally competitive firm in long-run equilibrium?

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BlackTom AI · Accepted Answer

To approach this question, we first recall what characterizes a monopolistically competitive firm in the long run. In such markets, firms differentiate their products and face downward-sloping demand, so they maximize profit where marginal revenue equals marginal cost (MR = MC). However, because there is freedom of entry and exit, economic profits tend to be driven to zero in the long run, which implies price equals average total cost (P = ATC).

Option 1: 'Price equals marginal cost and average total cost.' This is incorrect because, in monopolistic competition, price typically exceeds marginal cost due to the downward-sloping demand faced by each differentiated firm. P = MC would suggest a pricing condition more aligned with perfect competition.

Option 2: 'The firm makes no attempt to differentiate its products.' This is false by the very definition of monopolistic competition, where product differentiation is the core feature that gives firms some market power and a downward-sloping demand curve for each firm.

Option 3: 'Price equals average total cost but is greater than marginal cost.' This matches the standard long-run equilibrium outcome for monopolistic competition: zero economic profit implies P = ATC, and because the firm faces a downward-sloping demand and sets MR = MC, we typically have P > MC. This reflects the presence of excess capacity and the markup over MC.

Option 4: 'The firm earns positive economic profits by producing at minimum average cost.' This is inconsistent with the long-run equal-profit condition in monopolistic competition, where profits are driven to zero, and ATC is not necessarily minimized by the firm’s output in the long run.

Option 5: 'Price equals marginal cost and is greater than average total cost.' This cannot occur because if P = MC and P > ATC, profits would be positive and the no-entry condition would be violated; in the long run, profits are driven to zero.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Which of the following is true of a monopolisti-cally competitive firm in long-run equilibrium?

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