Chapter 12R, Problem 15MCQ

To determine

The correct option that define the consequences for equilibrium quantity and price in long-run.

Answer to Problem 15MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Marginal cost is $0.25 per unit, ATC is $0.50, Price is $1.0 and quantity is $10,000. In long-run equilibrium condition in monopolistic competition, firms quote price higher than the marginal cost and also they produce less output. Cost of production in monopolistic is higher than in perfect competition. Thus, the output level decreases and the profit should also be decreases. Therefore, option d is correct.

Explanation for incorrect options:

a.

As the output level increase the profit of the firm also increases because in monopolistic competition prices remain same for products produced by all firms. Therefore, option a is incorrect.

b.

If quantity is increased or decreased then it will definitely impact the firm’s profit. Therefore, option b is incorrect.

c.

To attain equilibrium quantity, MR should be equal to MC. This indicates that the output level should be decreased. Therefore, option c is also incorrect.

e.

If the output level is decreased then the overall profit will also decrease. Therefore, option e is incorrect.

Economics Concept Introduction

Monopolistic market structure: Market structure where there are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.