Price and output decisions in Monopolistic Competition

Question

Illustrates the price and output decisions in Monopolistic Competition?

Answer 1

Under Monopolistic Competition the price and output decisions:

Short run period

Under short run, each existing firm is a monopolist containing a downward sloping demand curve for product of it. In order to reduce its profit the firm will produce which level of output at which MC=MR when price is more than MR, here it will be abnormal profit.

Long –Run Period

In the long period, normal profits will vanish. Latest firms will enter the industry and following expansion of output will reduce the price and only normal profit is made by the firms. Only while Average Cost (AC) equals the Average Revenue (AR), the Profit is normal. Then the equilibrium output will be at AC and MC=MR.