Question

You are hired as the consultant to a monopolistically competitive firm. The firm reports the following information about its​ price, marginal​ cost, and average total cost: P>MC, P=ATC. In what position is the monopolistically competitive firm?

A. A long run disequilibrium position
B. A short run disequilibrium position
C. A long run equilibrium position
D. A short run equilibrium position

Answer 1

C. A long run equilibrium position

Step-by-step explanation:

• In the long run of monopolistical competition there are zero benefitis for the firms (P=ATV). This is because when there are no more incentives for firms to enter the market (which happens when there are possitive benefits, which means P>ATC).
• Each time a firms enter, it "captures" a part of the demand for our products, reducing demand. When benefits reduce to zero, no other firm has incentives to enter .
• Because a monopollistically competitive firm still faces a unique demand for its products, equilibria conditions state that it will produce the quantity delimited by the condition MC=MI (marginal cost equal to marginal income), then, marginal cost would be lower than price.
• This two considerations alltogheter determine the long run equilibria of a monopollistically competitive firm. See picture above.