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CA Foundation · Business Economics · Price Determination in Different Markets

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

A monopolistically competitive firm produces less than the output at minimum average cost in the long run, leaving excess capacity. Its downward-sloping demand curve touches the average cost curve on the falling part, though price still equals average cost and only normal profit is earned.

  1. AAt the minimum point of its average cost curve, so there is no excess capacity
  2. BLess than the output at minimum average cost, leaving excess capacityCorrect
  3. CMore than the output at minimum average cost, causing overutilisation
  4. DAt a price below average cost, earning losses

Explanation

The downward-sloping demand curve is tangent to the falling portion of the average cost curve, so output is below the minimum-AC level. The gap is called excess capacity. Price equals average cost, so there are no losses, and output is not beyond minimum AC.

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