Question

In long-run equilibrium in monopolistic competition, price is: a. equal to average total cost at an output below where average total cost is minimized. b. equal to average total cost at an output above where average total cost is minimized. c. greater than average total cost. equal to average total cost at its minimum.

Answer 1

Answer: d. equal to average total cost at its minimum.

Step-by-step explanation:

In the short run, the firm in a monopolistic market, being the only player is able to fix the prices of products and services, thereby maximizing profit.

In the long run however, a monopolistic market will cease to be so, as more firms enter the market to take advantage of the high profits or demand drops due to the high price. At this stage, the goal is not to maximize profits but to break even. Therefore, prices are reduced, made equal to the average total cost.