Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?
A) Marginal revenue is equal to marginal cost.
B) Price is equal to average revenue.
C) The firm has excess capacity.
D) Price is equal to marginal cost.
The correct answer and explanation is :
Correct Answer:
D) Price is equal to marginal cost.
Explanation:
Monopolistic competition is a market structure characterized by many firms selling differentiated products with relatively free entry and exit. In the long-run equilibrium, firms in this market reach a point where they earn zero economic profit, but they still operate with some inefficiencies due to product differentiation and brand loyalty.
- Marginal Revenue Equals Marginal Cost (MR = MC) (Option A)
In any profit-maximizing firm, including those in monopolistic competition, the firm will always produce at the point where marginal revenue (MR) equals marginal cost (MC). This is the fundamental condition for profit maximization. - Price Equals Average Revenue (P = AR) (Option B)
In monopolistic competition, firms face a downward-sloping demand curve, meaning that the price they charge is the same as the average revenue (AR) at that quantity. This is true in both the short-run and the long-run. - The Firm Has Excess Capacity (Option C)
Unlike perfectly competitive firms, which produce at the minimum point of the average total cost (ATC) curve, monopolistically competitive firms do not achieve full efficiency. They operate with excess capacity—meaning they do not produce at the lowest possible cost. This happens because they do not produce at the minimum ATC. - Price Equals Marginal Cost (P = MC) (Option D) – Incorrect Statement
In perfect competition, P = MC in the long run. However, in monopolistic competition, P > MC because firms have some degree of market power due to product differentiation. This leads to a markup over marginal cost, causing inefficiency and deadweight loss.
Thus, the correct answer is D) Price is equal to marginal cost, as this condition does not hold in monopolistic competition.
Here is the economic diagram illustrating monopolistic competition in long-run equilibrium. The diagram visually represents how a monopolistically competitive firm operates, showing the relationships between demand, marginal revenue, marginal cost, and average total cost.