Question Describe the short-rum and long-run equilibrium in a monopolistically competitive firm

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Describe the short-rum and long-run equilibrium in a monopolistically competitive firm

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【General guidance】The answer provided below has been developed in a clear step by step manner.Step1/3Monopolistic Competition Monopolistic competition is a type of market structure where firms deals with differentiated, close but imperfect substitutes. This type of market structure shares characteristics from monopoly and perfect competition thus its name 'monopolistic competition'. Most monopolistic competitive firms are found in restaurant, hairdressing and clothing industries.Explanation:In the present case average cost is equal to average revenue that is MP. Therefore, in long run, the profit is normal. In the short run, equilibrium is attained when marginal revenue is equal to marginal cost. However, in the long run, both the conditions (MR=MC and AR=AC) must hold to attain equilibrium.Step2/3In Short-run equilibrium, the firm maximize profit by producing where marginal revenue equals marginal cost (MR=MC) and charge price directly above the MR=MC on the demand curve. The price is greater than Average cost (P>AC). The economic pro ... See the full answer