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      Question

      A monopolistically competitive firm is in long-run

      equilibrium. Which of the following combinations of conditions holds simultaneously?
      A P = MC and P = AC, with the firm producing at the minimum point of its LAC curve Correct Answer Incorrect Answer
      B P > MC and P = AC, with the firm producing to the left of the minimum point of its LAC curve, resulting in excess capacity Correct Answer Incorrect Answer
      C P = MC and P > AC, with positive long-run economic profits attracting new entrants Correct Answer Incorrect Answer
      D P > MC and P > AC, with firms earning supernormal profits in the long run due to product differentiation Correct Answer Incorrect Answer

      Solution

      Two simultaneous long-run conditions: • P = AC (Zero Profit): Free entry/exit eliminates supernormal profits. Revenue exactly covers total cost. • P > MC (Allocative Inefficiency): Downward-sloping demand means MR < P always. Profit max: MR = MC, so P > MC. The tangency of demand and LAC occurs on the downward-sloping segment of LAC — to the left of minimum LAC. This is Chamberlin’s excess capacity theorem. Option (A) describes perfect competition. Options (C) and (D) are short-run positions only.

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