Question

In comparing the long-run equilibrium of a monopolistically competitive firm and a perfectly competitive firm, which of the following is incorrect? Select one: a. they both produce at the minimum point of the average cost curve ob. the both produce at point where price equals average costs c. they both produce where MR = MC od. the both make zero economic profits e. none of the above. o

Answer 1

option a - This is the correct option. Unlike PC firms, monopolistic firms do not produce at the minimum point of AC curve. The reason is that they have a seperate MR and AR curve. They tend to produce at P> MR=MC and produce rather on the falling part of AC curve. In the long run, when more firms enter the market and individual firms demand falls, then monopolistic competition firms do earn normal profits like PC firms, but there P=AC>MC. This is due to the excess capacity in monopolistic market as they do not produces at the minimum efficient scale.

option b - is incorrect because in long run, both types of firm earn normal profits and produce at P=AC.

option c - is incorrect because both produce output at MR=MC in long run

option d - In the long run both makes zero ecnomic profits due to free entry and exit of firms. Hence incorrect option.

option e - not applicable.