Which of the following conditions holds for a...

Which of the following conditions holds for a monopolistically competitive firm that is in equilibrium in the long run? Group of answer choices Price equal to marginal cost Marginal cost equal to average cost Price equal to average cost Marginal cost equal to average revenue

Transcript

00:01 So here we're looking at an example of monopolistically competitive market in long run equilibrium.

00:07 So over here on the right side, we've got that long run equilibrium for monopolistically competitive.

00:12 But for this question, it's important to kind of realize what perfectly competitive equilibrium also looks like.

00:18 So over here on the left, we've got perfectly competitive equilibrium.

00:22 So let's just go in reverse order here.

00:24 So if we're looking at answer d, it's saying that firms produce, and we're, where do they produce the minimum of average total cost that is definitely true in the perfectly competitive scenario however in the marginally in the monopolistically competitive scenario we see that that's not true because the firms are producing at the downward sloping part of average total cost so they're producing more so in this region right here and this quantity again is dictated by a profit maximizing quantity which is determined by when your mr and your mc cross.

01:03 So this is where your quantity is determined, and this is where your price is determined.

01:07 Again, this is not the minimum of the atc curve.

01:10 So d is not the answer.

01:12 Then we look at c.

01:13 Firms make positive economic profits.

01:16 Well, an important thing to realize is that in your transition from short term to long term, the entry and exit scenario for monopolistically competitive firms is going to be that if firms see, if outsiders see that there's profit being made by others, they're going to say, okay, i want my slice and they're going to enter the market.

01:35 So there is no profit being made here.

01:38 There is no economic profits that are happening.

01:42 Then, so we know c is not the answer.

01:45 And then b, we're looking at price being equal to marginal revenue.

01:48 Well, over here, we can see that our price is going to be over here...