Explain the similarities and differences between the long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm. Illustrate your answer with a graph demonstrating the long-run equilibrium for the two types of firms
What will be an ideal response?
Refer to the graph above. For both types of firms, in long-run equilibrium output satisfies MR = MC (that is, firms maximize profits), although this condition yields different output levels for the two firms as depicted in the graph. The perfectly competitive firm faces the demand curve Da and produces output Qa while the monopolistically competitive firm faces demand curve Db and produces a lower output level, Qb. The perfectly competitive firm charges a lower price, Pa, compared to the price the monopolistically competitive firm charges, Pb. However, both firms break even. The perfectly competitive firm achieves both allocative efficiency (P = MC) and productive efficiency (lowest possible average cost). This is not the case for the monopolistic competitor since its price exceeds the marginal cost of producing the last unit and the output level is not consistent with the lowest average cost.
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