Below is demand/MR curve of market and MC/AC curve of a firm in monopolistic com

Question

Below is demand/MR curve of market and MC/AC curve of a firm in monopolistic competition situation.

Problem : If this firm operates like a firm in perfect competition, what would be the equilibrium price and qunatitiy?

I wonder is it possible to automatically adopt P=MC condition to this situation. In this case, as the demand curve and MR curve are not horizontal, the equation P=MC seems not proper equilibrium. If such condition is adopted, the equilibrium quantity seems 45 and price is 55. However, as the price is higher than AC at such quantity level, this firm acts like a firm in perfect competition seems get profit higher than 0.

Is it correct to answer that price is 50 and quantity is 50? In such level, this firm seems get 0 profit which means perfect competition is well functioned.

Explanation / Answer

Your point is valid, but only in long run. A perfectly competitive firm is definitely capable of earning short run profits which may be positive if AC < Price (AC < MC). Only in the long run, Price = MC = AC and profits are zero.

Your second concern is also valid: Since in this case, demand curve is not horizontal, is it prudent to apply the P = MC rule by equating MC and demand curve? The answer is technically: No. But we do not have any alternative demand curve provided. So we have to assume that, if the firm is perfectly competitive, the demand curve will not slope downward, and instead will be horizontal at a price of 55 (the price at which MC intersects the downward sloping demand curve). So, perfectly competitive price is 55 and quantity is 45.

We cannot accept a price of 50 where MC = AC unless the question specifically mentions that the perfectly competitive firm is in long run equilibrium. By default, MC = AC only in long run. So we cannot equate price with AC in a short run equilibrium situation.

I hope I am able to clarify your queries (which are certainly valid ones). But keep in mind, unless your question states the equilibrium is a long-run equlibrium, you have to always assume it is a short run situation that is being depicted.

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