in long-run equilibrium, both prefectly compeitve and monopolistcally competitve
ID: 1234259 • Letter: I
Question
in long-run equilibrium, both prefectly compeitve and monopolistcally competitve markets achieve a tangecy between the firm's dd demand curve and its average cost curve , figure 10-4 showes the tengency for a monopolistic compeetitor, while figure 10-10 displays the tegency for a perfect competitor . discuss the similarities and differences in the two situations with respect to :
B. the extent of divergence between price and marginal cost
Explanation / Answer
In a perfectly competitive market, each firm individually faces a horizontal demand curve where Price (P)=Marginal Revenue (MR). So in choosing a production quantity where MR=Marginal Cost (MC), the firm prices where P=MR=MC. In a monopolistically competitive market each firm faces a downward sloping demand curve, where P>MR. So in choosing a production quantity where MR=MC, he prices above marginal revenue and marginal cost.
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