Refer to the diagram for a monopolistically competitive firm. In long-run equilibrium, the price charged by the firm will be:

• A. less than average total cost and equal to marginal cost
• B. greater than both average total cost and marginal cost
• C. equal to average total cost and greater than marginal cost
• D. equal to marginal cost and average total cost

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive firm in long-run equilibrium: such a firm produces where its demand curve is tangent to its average total cost (ATC) curve, meaning it earns zero economic profit.
2. Recall that in monopolistic competition, the firm faces a downward-sloping demand curve, so the price (P) is set above marginal cost (MC) because the firm has some market power and can mark up price over MC.
3. Identify that at long-run equilibrium, the price equals the average total cost (P = ATC), ensuring zero economic profit, but since the demand curve is downward sloping, the price is greater than marginal cost (P > MC).
4. Use the relationship between price, marginal cost, and average total cost to eliminate incorrect options: price less than ATC and equal to MC is inconsistent with zero profit; price greater than both ATC and MC implies positive profit; price equal to MC and ATC implies perfect competition, not monopolistic competition.
5. Conclude that the correct long-run equilibrium condition for a monopolistically competitive firm is price equal to average total cost and greater than marginal cost (P = ATC > MC).