Chapter 67, Problem 5MCQ

To determine

To choose: the option that states the long-run outcome of a monopolistically competitive industry.

Answer to Problem 5MCQ

The correct option is E i.e., a tradeoff between higher average total cost and more product diversity.

Explanation of Solution

There are no fixed factors of production in the long run in monopolistic competition. Therefore, the firms are very inefficient and thus they can only break even.

The amount of goods that a firm will produce in monopolistic competition is determined by the point where LRMC = MR i.e. the long-run marginal cost curve overlaps/ intersects the marginal revenue (MR). The price will be determined from the point where the Q i.e. quantity produced falls on the AR curve (average revenue curve) The consequence is that the firm will break even in the long-term

So, the long-run outcome in a monopolistically competitive industry results in a tradeoff between higher average total cost and more product diversity.