Which of the following is not true for monopolistically competitive firms in the long run? Economic profit equals zero, price equals average total cost, average total costs is minimized, marginal revenue equals marginal cost or price exceeds marginal revenue
The Correct Answer and Explanation is:
Correct answer: Average total cost is minimized.
In the long run, monopolistically competitive firms operate under conditions that differ significantly from perfect competition. These firms sell products that are differentiated, which gives them some degree of market power. Due to this, their long-run outcomes reflect a unique blend of competitive and monopolistic features.
One defining characteristic is that economic profit equals zero in the long run. When new firms enter the market due to short-run profits, the demand curve faced by each firm shifts to the left until profits are eliminated. This results in the firm’s price equaling its average total cost (ATC)—another true statement. However, this equality does not occur at the minimum point of the ATC curve.
Average total cost is not minimized in the long run under monopolistic competition. These firms do not produce at the minimum point on the ATC curve because they do not operate at full capacity. Instead, they produce at an output level where price equals ATC, but to the left of the ATC curve’s minimum. This situation creates excess capacity. In contrast, perfect competitors produce at the minimum ATC, achieving productive efficiency.
Furthermore, marginal revenue equals marginal cost at the profit-maximizing quantity, a standard condition for all profit-maximizing firms, including monopolistically competitive ones. Lastly, price exceeds marginal revenue because the downward-sloping demand curve implies that to sell an additional unit, the firm must lower its price, reducing the marginal revenue below the price.
Thus, the only incorrect statement is that average total cost is minimized. In monopolistic competition, this inefficiency—producing at a point above the minimum ATC—is a known long-run outcome due to product differentiation and downward-sloping demand.
