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15 January, 11:18

A monopolistic competitive firm is currently charging a price of $10 and producing 12,000 units/month. It faces monthly fixed costs of $15,000 and has an average variable cost of $6/unit. In the long run, we would expect:

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  1. 15 January, 11:34
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    either the selling price decreases or the total output decreases

    Explanation:

    The firm's income statement:

    total sales revenue = $120,000

    minus total variable costs = ($72,000)

    minus total fixed costs = ($15,000)

    net profit = $33,000

    The long run equilibrium for a monopolistically competitive firm occurs when the firm is making no economic profit since it is charging a price = average total cost.

    In this case the average total cost per unit = $6 per unit + ($15,000 / 12,000 units) = $7.25 per unit

    Since the firm is currently charging a higher selling price than average total cost ($10 > $7.25), one or two things might happen in the long run:

    selling price will decrease output will decrease
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