Question

A monopolistic 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:

Answer 1

either the selling price decreases or the total output decreases

Step-by-step explanation:

The firm's income statement:

total sales revenue = $120,000

minus total variable costs = ($72,000)

minus total fixed costs = ($15,000)

net profit = $33,000

The long run equilibrium for a monopolistically competitive firm occurs when the firm is making no economic profit since it is charging a price = average total cost.

In this case the average total cost per unit = $6 per unit + ($15,000 / 12,000 units) = $7.25 per unit

Since the firm is currently charging a higher selling price than average total cost ($10 > $7.25), one or two things might happen in the long run:

1. selling price will decrease
2. output will decrease