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, $P = M C$, and $M C = M R$.
B) the slope of the demand and average cost curves are negative, $P M C$, and $M C M R$
C) the slope of the demand and average cost curves are positive, $P M C$, and $M C = M R$
D) the slope of the demand and average cost curves are the same, $P M C$, and $M C = M R$.

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, $P = M C$, and $M C = M R$.
B) the slope of the demand and average cost curves are negative, $P > M C$, and $M C > M R$
C) the slope of the demand and average cost curves are positive, $P > M C$, and $M C = M R$
D) the slope of the demand and average cost curves are the same, $P > M C$, and $M C = M R$.

Quizplus · Accepted Answer

In long run equilibrium, firms in monopolistic competition produce at a level where P = MC, just like in perfect competition. However, due to product differentiation, the demand curve is downward sloping and therefore the price is higher than the marginal cost. The profit-maximizing level of output is where MC = MR. The slope of the demand curve will be steeper than the slope of the average cost curve, which means that firms are not operating at their minimum efficient scale. Therefore, choice D is the only option that correctly reflects all the characteristics of long run monopolistic competition. In the long run, monopolistically competitive firms will produce where marginal revenue (MR) equals marginal cost (MC), just like in perfect competition. However, since each firm produces a slightly differentiated product, they have some market power and are able to charge a price higher than their average cost (MC). Therefore, the demand curve will have a negative slope, but not as steep as in a monopoly. In the long run, firms will produce where their average cost curve intersects the demand curve, and at this point, the slope of the demand curve will be equal to the slope of the average cost curve. Since MR = MC at this point, the slope of the MR curve will also be the same as the slope of the average cost curve. Therefore, the correct choice is D, where the slope of the demand and average cost curves are the same, price is greater than average cost, and MR = MC.

What of the Following Is Completely True in Long Run P=MCP = M CP=MC

What of the Following Is Completely True in Long Run $P = M C$