Chapter 13

Thus in the long run, monopolistically competitive firms are similar to perfectly competitive firms: Neither type of firm is protected by barriers to entry and so neither firm can earn an economic profit in the long run. The best perfectly competitive and monopolistically competitive firms can do is earn a normal, that is, an "average" profit.

However, monopolistically competitive firms do differ in one important regard from perfectly competitive firms. In the long run, perfectly competitive firms are forced to produce at the minimum average total cost. In the long run, monopolistically competitive firms do not produce at the minimum average total cost. The firm illustrated in the figure is producing Q₁ (and setting a price of P). This firm, like all monopolistically competitive firms, produces less output than the level that minimizes average total cost, which occurs when output is Q₂. Because these firms produce less output than that which minimizes average total cost, monopolistically competitive firms have excess capacity . Perfectly competitive firms do not have excess capacity; they produce the amount of output that minimizes average total cost. Thus, in this regard, perfectly competitive and monopolistically competitive firms are not the same.

The Study Guide to accompany the textbook has plenty of problems for you to test your grasp of this material. Work True or False questions 5, 6, and 9; Multiple Choice questions 8, 9, 10, and 11; and Problems 1 and 2. Particularly important in this list are True or False question 9, Multiple Choice questions 9 and 11, and Problems 1 and 2. Be sure that you do not miss theses questions.

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