Chapter 67, Problem 6MCQ

To determine

The correct option for a firm that is in a monopolistic competitive industry but not a monopolist.

Answer to Problem 6MCQ

From the available options, the correct option is the firm’s ATC curve will be tangent to its demand curve in the long run.

Explanation of Solution

As there are high barriers to entry of new firms in the market which makes monopolists can avoid competition and generate positive income profit in the long run. Both firms in industry monopolistic competitive and monopolist are price takers in the market and therefore both are not required to spend on advertising except in extreme cases. Monopolists face a downward-sloping demand curve in the market whereas, in long run, monopolistically competitive industry has a firm’s average total cost curve that would be tangent to the demand curve as it is not true in the case of monopolists.

It means the correct option is c (the firm’s ATC curve will be tangent to its demand curve in the long run) and all other options would be incorrect.

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple

manufacturers compete with one another yet sell distinct products that are not exact substitutes.