Which of the following is NOT a characteristic of long – run equilibrium in monopolistic competition? A. production occurs at minimum average total cost B. the firm earns zero economic profit C. marginal revenue is equal to marginal cost D. price exceeds marginal revenue E. price equal to average total cost
The correct answer and explanation is:
The correct answer is A. production occurs at minimum average total cost.
In long-run equilibrium in monopolistic competition, production does not occur at the minimum average total cost. Here’s why:
Monopolistic competition is a market structure characterized by many firms selling differentiated products. Each firm has some market power to set prices above marginal cost due to product differentiation. In the long run, firms enter or exit the market until economic profits are zero. This means the firm’s price equals average total cost, but not necessarily at the minimum point of the average total cost curve.
Explanation:
- Zero Economic Profit: In the long run, entry and exit of firms drive profits to zero, so firms earn just a normal profit. This corresponds to price equaling average total cost (Answer B and E).
- Price Exceeds Marginal Revenue: Because each firm faces a downward-sloping demand curve for its differentiated product, marginal revenue is less than price (Answer D).
- Marginal Revenue Equals Marginal Cost: Firms maximize profit where marginal revenue equals marginal cost (Answer C).
- Not Minimum Average Total Cost: Unlike perfect competition, firms in monopolistic competition do not produce at minimum average total cost. This is due to excess capacity — firms produce less than the output that would minimize average total cost. The demand curve is tangent to the average total cost curve above its minimum, so firms incur some inefficiency or waste capacity.
This means in monopolistic competition, firms produce on the downward-sloping part of their average total cost curve, leading to excess capacity and inefficiency. This is a key distinction from perfect competition, where long-run equilibrium leads to production at minimum average total cost.
To summarize, the feature that does not characterize long-run equilibrium in monopolistic competition is that production occurs at minimum average total cost. Instead, firms have some excess capacity and do not produce at the lowest point on the average total cost curve.