In a long-run equilibrium, a firm in a monopolistically competitive market operates
A)where marginal revenue is zero.
B)where marginal revenue is negative.
C)on the rising portion of its average total cost curve.
D)on the declining portion of its average total cost curve.

Question

Quizplus · Accepted Answer

In a long-run equilibrium, monopolistically competitive firms will produce where marginal revenue (MR) equals marginal cost (MC), but because they have market power, they will produce at a point where their price (P) is greater than their marginal cost (MC). This means that the firm will operate on the declining portion of its average total cost (ATC) curve, where its price will cover both its average variable cost (AVC) and some of its fixed costs. Operating at a point higher up on the ATC curve would mean that the firm is not covering all of its costs and is thus incurring losses, while operating at a point lower down on the ATC curve would mean that the firm is charging a lower price than necessary to cover its costs and is thus leaving potential profits on the table.

In a Long-Run Equilibrium, a Firm in a Monopolistically Competitive