Refer to the graph shown of a monopolistically competitive firm. You can conclud

Question

Refer to the graph shown of a monopolistically competitive firm. You can conclude that:

new firms will enter the industry in the long run. existing firms will exit the industry in the long run. the industry is in long-run equilibrium. the price of ladies' dresses is equal to the minimum possible average total cost.
Refer to the graph shown of a monopolistically competitive firm. You can conclude that: new firms will enter the industry in the long run. existing firms will exit the industry in the long run. the industry is in long-run equilibrium. the price of ladies' dresses is equal to the minimum possible average total cost.

Explanation / Answer

Answer: We can conclude that new firms will enter the industry in the long run.

Explanation: The monopolistically competitive firm is producing 8000 dresses per year at $85 per dress. This follows the condition Marginal Revenue = Marginal Cost (Short-run Equilibrium). But it is producing at an inefficient level i.e. 8000 dresses per year, where it can actually produce 12000 dresses per year where Price = Average Total Cost (Long-run Equilibrium) i.e. at $ 78 per dress. Such profitability levels will be observed by new players in the market which shall induce them to enter, until the Long-run Equilibrium condition is satisfied.

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