Can anyone help me out with the answer to this question? (Undergrad)
In the long run equilibrium, it is possible for a profit maximizing, monopolistically competitive firm to reduce average production costs by lowering the price of its brand of product?
This is an extra credit problem, and I honestly have no clue where to even begin as the professor's lectures and slides have never mentioned the long run in monopolistic competition. Any help is appreciated, and thanks in advance.
Posted Mar 21, 2017, 4:55 PM UTC
21
A firm in monopolistically competitive markets operate at a point where AC is downward sloping. like this
If the firm lowers its price, then output increases along the demand curve - and the average cost falls (not the curve, but movement down the AC curve as output increases).
So by lowering the price, output increases, and the AC falls. However, the price necessarily falls at a faster rate than the AC falls, which makes the profits go from zero to negative.
Note that this is not necessarily the case in the short run.