At the long-run equilibrium output level,a monopolistically competitive firm's average total cost curve
A)lies below the demand curve
B)is tangent to (just touches but does not cross)the demand curve
C)crosses the demand curve from below
D)crosses the demand curve from above
E)is at its minimum point

Question

Quizplus · Accepted Answer

At the long-run equilibrium output level, a monopolistically competitive firm produces where marginal cost equals marginal revenue, which is less than the price. Therefore, the firm operates with excess capacity and the average total cost curve is not minimized. However, the firm still competes through product differentiation and sets a price higher than its marginal cost. This means that the demand curve faced by the firm is downward sloping, but not perfectly elastic. At the long-run equilibrium, the firm produces a quantity where the marginal revenue equals the marginal cost, which occurs where the average total cost curve is tangent to the demand curve. Thus, the answer is B.

At the Long-Run Equilibrium Output Level,a Monopolistically Competitive Firm's Average