CFA Level I · CFA Level I Exam · The Firm and Market Structures
Compared with a perfectly competitive firm, a monopolistically competitive firm in long-run equilibrium most likely produces at an output level where:
Price exceeds marginal cost and average total cost is above its minimum. Downward-sloping demand puts marginal revenue below price, so MR = MC implies price above MC. Tangency to ATC occurs on the declining segment, leaving excess capacity relative to efficient scale.
- Aprice equals marginal cost and average total cost is at its minimum
- Bprice exceeds marginal cost and average total cost is above its minimumCorrect
- Cprice is below marginal cost and average total cost is at its minimum
Explanation
The demand curve is downward sloping, so marginal revenue lies below price. Profit maximization at MR = MC gives price above MC. Tangency with ATC occurs on its falling portion, so output is below efficient scale, which is excess capacity.
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