CA Foundation · Business Economics · Price Determination in Different Markets
In a monopolistic competition, the long-run equilibrium price and output occur where the firm's average total cost (ATC) curve is tangent to the demand curve. A firm produces 500 units at a price of ₹50 per unit where ATC = ₹50. Calculate the firm's economic profit and identify the condition this satisfies.
Economic profit is zero (₹0) because at long-run equilibrium in monopolistic competition, the price equals average total cost. This occurs where the demand curve is tangent to the ATC curve, ensuring firms earn only normal profit with no excess profits to attract new competitors.
- AEconomic profit is ₹0; this satisfies the condition of zero economic profit, where price equals ATC at equilibriumCorrect
- BEconomic profit is ₹25,000; the firm earns normal profit in long-run equilibrium
- CEconomic profit is ₹0, but the firm is not in equilibrium because ATC should equal marginal revenue
- DEconomic profit is ₹12,500; the firm has excess capacity typical of monopolistic competition
Explanation
In long-run equilibrium under monopolistic competition, the demand curve is tangent to the ATC curve, meaning price = ATC at the equilibrium quantity. With price = ₹50 and ATC = ₹50, economic profit = (Price − ATC) × Quantity = (50 − 50) × 500 = ₹0. This represents zero economic profit or normal profit, as firms' excess profits attract new entrants and drive prices down until P = ATC. Option 2 confuses terminology (normal profit is zero economic profit). Option 3 incorrectly states the equilibrium condition; ATC tangency (not MR equality) defines long-run equilibrium here. Option 4 misinterprets excess capacity as a sign of disequilibrium rather than a feature of monopolistic competition.
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