Question

In the long run, the monopolistically competitive firm's demand curve will:______.

a. become tangent to the ATC curve somewhere to the left of its minimum point.
b. intersect the ATC at its minimum point.
c. intersect the ATC curve somewhere past the minimum point.
d. become tangent to the ATC curve at its minimum point.

Answer 1

a. become tangent to the ATC curve somewhere to the left of its minimum point.

Step-by-step explanation:

In the long-run, monopolistically competitive firms make zero economic profit, because the free entry and exit of firms that is characteristic of this market structure will result in the reduction of economic profits to zero.

However, the reason why the demand curve becomes tangent to the ATC curve somewhere to the left of its minimum point is because the monopolistically competitive firm will still charge a price that is above minimal average cost.

Finally, the exact location of the tangent point is determined by the intersection of marginal revenue and marginal cost, the tangent point being the price that is exactly above this intersection, in other words, the profit-maximizing price.