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 the above.

Question

Quizplus · Accepted Answer

In monopolistic competition, firms are able to differentiate their products from those of their competitors, allowing them to have some pricing power. In the long-run, firms will adjust their production levels until they are making normal profits, meaning that price equals long-run average cost. Therefore, choice A is the correct answer. B is incorrect because profit-maximizing firms will not operate at the minimum long-run average cost, as this would result in zero profit. C is incorrect because monopolistically competitive firms do not typically face insufficient capacity.

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