In the long run, the price in a perfectly competitive market will
A) equal ATC at its minimum.
B) be determined by the intersection of the firm’s supply and demand curves.
C) equal MC at its minimum.
D) be determined by the intersection of the firm’s marginal cost and average variable cost curves.
In long run equilibrium, a monopolistically competitive firm will produce a quantity
A) where average total cost is at a minimum.
B) that is less than the quantity where average total cost is at a minimum.
C) that is more than the quantity where average total cost is at a minimum.
D) where marginal cost intersects average total cost.
The Correct Answer and Explanation is :
Correct Answers:
- For the perfectly competitive market question:
A) Equal ATC at its minimum. - For the monopolistically competitive firm question:
B) That is less than the quantity where average total cost is at a minimum.
Explanation:
1. Perfectly Competitive Market:
In the long run, firms in a perfectly competitive market will produce where price equals marginal cost (MC) and average total cost (ATC) at its minimum point. This outcome is due to the high level of competition and the absence of barriers to entry or exit. If economic profits exist in the short run, new firms will enter the market, increasing supply and driving the price down. Conversely, if firms incur losses, some will exit, reducing supply and causing the price to rise. These dynamics ensure that firms earn zero economic profit in the long run, producing at the minimum point of ATC where they are most efficient. This results in optimal allocation of resources, aligning with the social benefit of perfect competition.
2. Monopolistically Competitive Market:
Monopolistically competitive firms face a downward-sloping demand curve due to product differentiation. In the long run, entry of new firms erodes economic profits, leaving firms with only normal profit. However, these firms do not produce at the minimum ATC. Instead, they operate at a level where price exceeds marginal cost (P > MC) and quantity is less than that which minimizes ATC. This is due to the cost of maintaining product differentiation (e.g., advertising or innovation) and the market power firms retain. The result is excess capacity, meaning the firm operates below its most efficient scale, leading to higher costs per unit compared to a perfectly competitive firm.
This inefficiency is a trade-off for the variety offered in monopolistic competition, which can benefit consumers by providing diverse options. However, the market does not achieve productive efficiency (minimum ATC) or allocative efficiency (P = MC).