Question

In the long-run, the firm under monopolistic competition is in equilibrium when ___________.

• A. MR=MC
• B. AR=AC
• C. TR>TC
• D. both (A) and (B)

Answer 1

The correct option is A MR=MC

A monopolistic firm produces at a level where MR=MC even in the short run. In case MR>MC, it will increase production because each unit produced earns more than its cost. This will continue till MR becomes equal to MC. If the firm produces at a level where MR<MC, each unit produced costs more than it earns, and the firm should reduce production to the level when MR becomes equal to MC.

In the long run, other firms are attracted by the huge profits, and given the absence of barriers to entry and exit, other firms also bring out similar products. The competition increases and the firm can no longer charge high prices. It, therefore, limits the average price to average cost and no longer earns supernormal profit.