The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will:
A) produce at the level in which price equals long-run average cost.
B) operate at minimum long-run average cost.
C) overutilize its insufficient capacity.
D) none of these.

Question

Quizplus · Accepted Answer

In the long-run, a monopolistically competitive firm will produce where price equals long-run average cost (LRAC). This is because in the long-run firms are able to adjust their output levels and prices in response to market conditions, resulting in firms earning normal profit. At this level of output, the firm is not overutilizing its insufficient capacity nor is it operating at minimum LRAC.

The Theory of Monopolistic Competition Predicts That in Long-Run Equilibrium