Question

Why can’t a monopolistic competition firm operate at the low point on their ATC curve?

Answer 1

A Monopolistically competitive firm

Since a monopolistic firm is that form of market in which there is large number of buyers and sellers and firm sells differentiated product based on quality, size, shape etc, therefore product is not homogeneous. Since firm is price maker but firm does not compete on the price but they compete in the market based on size, quantity quality etc.

In short-run a monopolistic competitive firm profit-maximizing condition is

MR=MC

A firm in the short-run may earn positive economic profit or negative economic profit but in the long-run it earns only zero economic profit.

In long-run a monopolistic competitive firm profit-maximizing condition is

MR=MC

Corresponding to this condition, profit-maximizing quantity price and ATC will be equal. This is because in long-run ATC and demand curve is tangent.

The firm does not produce at minimum point of ATC because MC curve is also U shape and it cuts ATC at its minimum point and firm profit-maximizing condition is MR=MC, so if MC cuts MR, then corresponding to this quantity price is determined and at this quantity MC cannot cut ATC at its minimum point, it is possible greater than this quantity. This is the reason why a monopolistically competitive firm is making zero economic profit but it is not producing at ATC at its minimum point.