Question

What are the differences between the​ long-run equilibrium of a perfectly competitive firm and the​ long-run equilibrium of a monopolistically competitive​ firm? Unlike perfectly competitive​ firms, in the long run monopolistically competitive firms A. do not produce at minimum average total cost and achieve productive efficiency. B. charge a price greater than marginal cost and do not produce at minimum average total cost. C. charge a price greater than marginal cost and have no excess capacity. D. earn positive economic profits and charge a price greater than marginal cost.

Answer 1

The correct answer is B. charge a price greater than marginal cost and do not produce at minimum average total cost.

Step-by-step explanation:

Monopolistic competition is a market similar to perfect competition, since there is a large number of companies and the entry of new companies is not limited. Its biggest difference is that in the monopolistic competition the product is differentiated. The monopoly power of the company depends on this differentiation from other companies.

The short-term equilibrium shows us that since the company's product differs from the product of its competitors, its demand curve has a negative slope. The maximizing amount of benefits is at the point of interserction of the marginal income curves and the marginal cost. As the price is higher than the average cost, the company obtains benefits.

The long-term equilibrium, the benefits cause the entry of new companies, so the company loses market share and sales, its demand curve shifts downward. This curve is exactly tangent to the curve of the average cost of the company. This implies zero benefits, since the price is equal to the average cost. The company continues to maintain monopoly power, but long-term demand means that the entry of other companies has reduced profits to zero.