Re: micro problems

Posted by Chocolate Frog on May 04, 2012; 9:22am
URL: http://discussion-forum.276.s1.nabble.com/micro-problems-tp7523947p7526510.html

(a) is definitely wrong because in the long run, there're no supernormal profits in a monopolistically competitive environment because of free entry, just as in perfect competition.

(c) is wrong because even a competitive firm can be thought of as equating MR and MC; MR just happens to be constant at the market price level.

That leaves us with (b), which is true because the long run equilibrium of a monopolistically competitive firm is characterised by tangency of demand and average cost curves. Since output level typically lies to the left of the point of minimum average cost, monopolistic competition is said to have excess capacity because if there were fewer firms, each firm would be able to operate at a more efficient level of output.