If a perfectly competitive firm and a monopolistic competitor in long run equili

Question

If a perfectly competitive firm and a monopolistic competitor in long run equilibrium face exactly the same demand and cost curves, then there is high probability that...

a. the former will earn zero economic profits, but the latter will earn positive economic profits.

b. both will earn zero economic profits, but the former will attain lower unit costs than the latter.

c. both will earn zero economic profits, but the latter will attain lower unit costs than the former.

d. both firms will earn zero economic profits, and attain the lowest possible unit costs. e. neither firm will earn zero economic profits, but both will attain the lowest possible unit costs

Explanation / Answer

(b) is the answer

In the long run, both are affected by the freedom of entry and exit. The entry of new firms drives down profit share and all firms end up earning normal profit. However, in case of the latter, they choose to produce below the optimal level in the long run and end up with excess capacity and higher per unit costs than the former.

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