What of the following is completely true in long run, monopolistically competitive equilibrium?
A) the slope of the demand and average cost curves are the same, P = MC, and MC = MR.
B) the slope of the demand and average cost curves are negative, P MC, and MC MR
C) the slope of the demand and average cost curves are positive, P MC, and MC = MR
D) the slope of the demand and average cost curves are the same, P MC, and MC = MR.

Question

What of the following is completely true in long run, monopolistically competitive equilibrium?
A) the slope of the demand and average cost curves are the same, P = MC, and MC = MR.
B) the slope of the demand and average cost curves are negative, P > MC, and MC > MR
C) the slope of the demand and average cost curves are positive, P > MC, and MC = MR
D) the slope of the demand and average cost curves are the same, P > MC, and MC = MR.

Quizplus · Accepted Answer

A monopolistically competitive firm maximizes profit where MC = MR, but charges a price above its marginal cost, resulting in P > MC. The demand curve faced by the firm is downward sloping, which implies that the demand and average revenue curves have negative slopes. However, due to product differentiation, the firm has some market power and can charge a price above its marginal cost. This results in the average cost curve being higher than the marginal cost curve, with a positive slope to reflect that. In the long run, firms in monopolistic competition earn zero economic profit, which implies that the price charged will cover both the average variable cost and the opportunity cost of the capital employed. As a result, the long-run equilibrium occurs where the demand and average cost curves intersect, with both having the same slope. Therefore, option D is the correct answer.

What of the Following Is Completely True in Long Run