Business Degree Certification Practice Test

At long-run equilibrium in a monopolistically competitive market, which statement is false?

1. Price equals Average Total Cost.

2. Price exceeds Marginal Cost.

3. Firms make zero economic profit.

4. Firms produce at the bottom of the ATC curve.

The correct answer is: Firms produce at the bottom of the ATC curve.

In the long-run equilibrium of a monopolistically competitive market, firms will operate where price equals average total cost, resulting in zero economic profit. This happens because if firms were making an economic profit, new firms would be attracted to the market, driving down prices until only normal profits remain. The statement indicating that price exceeds marginal cost is also true. In monopolistic competition, firms have some market power and can set their prices above marginal cost, reflecting their ability to differentiate their products. However, the correct answer is that firms do not produce at the bottom of the average total cost (ATC) curve in long-run equilibrium. Instead, monopolistically competitive firms operate at a point where they have excess capacity, meaning that they are not producing at the most efficient scale. This results in the typical downward-sloping demand curve faced by these firms, indicating that they do not operate at the minimum point of the ATC curve. Therefore, the accurate representation of a monopolistically competitive firm in the long run shows it producing where it has some slack and is not maximizing productive efficiency.