Which of the following is true for a firm in long-run equilibrium in monopolistic competition? aGiven barriers to entry, the firm earns economic profits in long-run equilibrium. bThere is neither allocative nor productive efficiency. cPrice is greater than average total cost in long-run equilibrium. dThe firm is productively efficient, producing at the minimum of long-run average total cost.
Question
Which of the following is true for a firm in long-run equilibrium in monopolistic competition? aGiven barriers to entry, the firm earns economic profits in long-run equilibrium. bThere is neither allocative nor productive efficiency. cPrice is greater than average total cost in long-run equilibrium. dThe firm is productively efficient, producing at the minimum of long-run average total cost.
Solution
The correct answer is b. In a monopolistic competition, firms do not achieve allocative or productive efficiency in the long run.
Here's why:
a) This is incorrect because in monopolistic competition, there are no barriers to entry. This means that firms can enter or exit the market freely, and in the long run, firms will only earn normal profits.
b) This is correct. In monopolistic competition, firms do not produce at the lowest point of their average total cost curve, so they are not productively efficient. They also do not price at marginal cost, so they are not allocatively efficient.
c) This is incorrect. In the long run, price equals average total cost in monopolistic competition. This is because if firms were making profits, new firms would enter the market, increasing competition and driving down prices until they equal average total cost.
d) This is incorrect. As mentioned in b, firms in monopolistic competition do not produce at the minimum of the long-run average total cost, so they are not productively efficient.
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