Entry and exit drive each firm in a monopolistically competitive market to a point of tangency between its
A)marginal revenue curve and its total cost curve.
B)marginal revenue curve and its average total cost curve.
C)demand curve and its total cost curve.
D)demand curve and its average total cost curve.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms will produce where marginal revenue equals marginal cost in the short run. However, in the long run, firms will enter or exit the market depending on whether they are making profits or incurring losses. This will push prices towards the point of tangency between the firm's demand curve and its average total cost curve, as this is where the firm earns zero economic profit. Therefore, the firm will produce at a level where it can cover its average total cost but will not be able to earn significant economic profits.

Entry and Exit Drive Each Firm in a Monopolistically Competitive