Question

A monopolistically competitive firm is currently charging a price of $10 and producing 12,000 units/month. It faces monthly fixed costs of $15,000 and has an average variable cost of $6/unit. In the long run, we would expect:a. ​The firm to go out of businessb. ​The price will fall and output will fallc. ​The price will rise and output will falld. ​The price will fall and output will rise

Answer 1

The correct answer is option d.

Step-by-step explanation:

A monopolistic firm is producing 12000 units at a price of $10 per units.

The average variable cost per unit is $6/unit.

The fixed costs are $15,000.

The average fixed costs will be

=
`(TFC)/(Q)`

=
`(15,000)/(12,000)`

=1.25

The average total cost is

=average fixed cost+average variable cost

=$(6+1.25) per unit

=$7.25 per unit

Here, the price per unit is greater than average total cost per unit. This means that the firm is having supernormal profits. This will attract other firms to join the market.

In the long run, when new firms enter the market, the market supply will increase leading to a fall in price.