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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

New firms will enter a monopolistically competitive market if

a. marginal revenue is greater than marginal cost.

b. marginal revenue is greater than average total cost.

c. price is greater than marginal cost.

d. price is greater than average total cost.

To determine
Monopolistic competition and the entry of firms to the market.

Explanation

Option (d):

A monopolistically competitive firm will try to produce at a point where price is greater than average total cost, in order to earn economic profits. This leads to the entry of new firms to the market, which drives economic profit to zero in the long run (as price equals average total cost). Thus, option ‘d’ is correct.

Option (a):

When marginal revenue is greater than marginal cost, monopolistically competitive firms gear up their productionas each marginal unit brings in more profit by bringing in more revenue than its cost. Therefore, option ‘a’ is incorrect...

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