Question

Which of the following statements about a firm in long−run equilibrium is true?

A.

P > MC for a firm in monopolistic competition and P = ATC for a firm in perfect competition

B.

MR > P for a firm in monopolistic competition and P = ATC for a firm in perfect competition

C.

P = MC for a firm in perfect competition and P < ATC for a firm in monopolistic competition

D.

P = MC for firms in both monopolistic competition and perfect competition

E.

Both answers A and B are correct.

Answer 1

Answer
Option A
A.

P > MC for a firm in monopolistic competition and P = ATC for a firm in perfect competition

Any firm maximize profit at MR=MC
But for the perfectly competitive firm, the demand curve is horizontal because of the identical product and free entry and exit, so the MR and the demand curve is same, and it is equal to the minimum average total cost for the long run equilibrium of the perfect competition.
it means P=MR=MC=ATC

for monopolistic competition, the demand is downward sloping because of the differentiated product, but the profit is zero in the long run because of free entry and exit
it means MR=MC where P=ATC but MR<P and MC<P

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