Which of the following is true for a firm in long-run equilibrium in monopolistic competition?

• A. The firm produces where marginal cost is greater than marginal revenue.
• B. The firm earns zero economic profit.
• C. The firm faces a perfectly elastic demand curve.
• D. The firm produces at the minimum point of its average total cost curve.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the characteristics of long-run equilibrium in monopolistic competition. In this market structure, firms have some market power due to product differentiation, but free entry and exit drive economic profits to zero in the long run.
2. Step 2: Recall that in long-run equilibrium, a firm maximizes profit where marginal cost (MC) equals marginal revenue (MR), but because of downward-sloping demand, price (P) is greater than MC, and MR is less than price.
3. Step 3: Recognize that zero economic profit means the firm's total revenue equals total cost, including opportunity costs. This occurs where the demand curve is tangent to the average total cost (ATC) curve, so price equals ATC.
4. Step 4: Note that the demand curve faced by a monopolistically competitive firm is downward sloping, not perfectly elastic, so the firm does not face a perfectly elastic demand curve.
5. Step 5: Understand that the firm does not produce at the minimum point of the ATC curve in monopolistic competition because excess capacity exists; the firm produces at a quantity where ATC is declining but not minimized.