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CFA Level I · CFA Level I Exam · The Firm and Market Structures

Compared with a perfectly competitive firm in long-run equilibrium, a monopolistically competitive firm in long-run equilibrium most likely produces:

The monopolistically competitive firm produces below minimum efficient scale, with excess capacity, and charges a price above marginal cost. Its downward-sloping demand touches average total cost left of the minimum point, unlike a perfectly competitive firm.

  1. Aat a lower output than the minimum efficient scale, with price above marginal costCorrect
  2. Bat the minimum point of average total cost, with price equal to marginal cost
  3. Cat a higher output than the minimum efficient scale, with price below marginal cost

Explanation

The downward-sloping demand curve is tangent to average total cost to the left of its minimum, so there is excess capacity. Profit maximization sets marginal revenue equal to marginal cost, and price exceeds marginal cost. This differs from perfect competition, where price equals marginal cost at minimum average cost.

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