Which of the following is true of a monopolistically competitive firm in long-run equilibrium?

• A. It is a price taker.
• B. It earns zero economic profit.
• C. It produces at the minimum point of its average total cost curve.
• D. It faces a perfectly elastic demand curve.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of a monopolistically competitive firm. Such a firm has many competitors, differentiated products, and some control over its price, unlike a perfectly competitive firm which is a price taker.
2. Step 2: Recall that in the long-run equilibrium, firms in monopolistic competition earn zero economic profit because if there were profits, new firms would enter the market, increasing competition and driving profits down.
3. Step 3: Note that a monopolistically competitive firm does not produce at the minimum point of its average total cost (ATC) curve in the long run. Instead, it produces where marginal cost (MC) equals marginal revenue (MR), but this output is less than the output at minimum ATC due to excess capacity.
4. Step 4: Recognize that the demand curve faced by a monopolistically competitive firm is downward sloping and not perfectly elastic, because the firm has some market power due to product differentiation.
5. Step 5: Conclude that the true statement about a monopolistically competitive firm in long-run equilibrium is that it earns zero economic profit, reflecting the balance between entry and exit in the market.