What is true of a monopolistically competitive market in long-run equilibrium?

• A. Price is greater than marginal cost
• B. Price is equal to marginal revenue
• C. Firms make positive economic profits
• D. Firms produce at the minimum of average total cost

Answer: (A)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive market: Many firms, differentiated products, and free entry and exit in the long run.
2. In long-run equilibrium, firms in monopolistic competition will adjust their output such that they earn zero economic profits due to the entry of new firms attracted by any initial profits.
3. Recognize that in monopolistic competition, firms have some market power, allowing them to set prices above marginal cost. This is due to product differentiation, which gives firms some control over their pricing.
4. Analyze the relationship between price and marginal revenue: In monopolistic competition, the demand curve is downward sloping, meaning marginal revenue is less than price.
5. Consider the production level: Firms do not produce at the minimum of average total cost in long-run equilibrium because they face a downward-sloping demand curve, leading to excess capacity.