A monopolistically competitve firm produces 100 units of output per period, selling each unit for $75. Marginal revenue and marginal cost of the one-hundredth unit are each $50. Average total cost is $60.

a) Does this situation correspond to short-run equilibrium? Why or why not?

b) Does this situation correspond to long-run equilibrium? Why or why not?

What do YOU think?

To determine whether the situation corresponds to short-run equilibrium, we need to look at the relationship between marginal revenue (MR), marginal cost (MC), and price. In the short run, a monopolistically competitive firm will maximize profit by producing the quantity where MR equals MC.

a) Short-Run Equilibrium:
Given that the marginal revenue and marginal cost of the 100th unit are both $50, this means that producing the 100th unit has brought the firm to the point where MR=MC. However, we do not have information about the price at which the 100th unit is being sold. To check if it is the optimal quantity, we need to compare the marginal cost to the price.

In a monopolistically competitive market, the firm's demand curve is downward sloping. Since the firm is selling each unit for $75, we know that it is exceeding the marginal cost. Hence, this situation does not correspond to short-run equilibrium because the firm is not producing the quantity at which MR=MC and generating the highest possible profit.

To summarize:
- MR =$50 (marginal revenue)
- MC =$50 (marginal cost)
- Price =$75 (selling price)
- Short-run equilibrium is not met because MR is not equal to MC.

b) Long-Run Equilibrium:
In the long run, a monopolistically competitive firm will adjust its production and price to reach zero economic profit. To determine if the situation corresponds to long-run equilibrium, we need to compare the average total cost (ATC) to the price.

Given that the average total cost is $60, and the selling price is $75, we can see that the firm is earning positive economic profit ($75 - $60 = $15 per unit). In the long run, this would attract new firms to enter the industry, increasing competition and reducing economic profit.

Hence, this situation does not correspond to long-run equilibrium because the firm is earning positive economic profit, which would not be sustainable.

To summarize:
- ATC =$60 (average total cost)
- Price =$75 (selling price)
- Long-run equilibrium is not met because the firm is earning positive economic profit.