Market Structure: Monopolistic Competition

Incorrect. If the average variable cost is $3.00, then the total variable cost will be $3,000. It is equal to the total revenue. The seller has a loss, and it cannot be a long-run equilibrium.

A seller of ice cream operates in a monopolistically competitive market. In the long-run equilibrium, the price is $3.00/cone and it sells 1,000 cones per day. It pays $500 for its manager, storefront, and equipment per day. Which is _most likely_ to be its average variable cost on labor and materials?

Correct! In the long-run equilibrium, a firm earns zero economic profits. Since the total revenue is $3,000, the total cost must be $3,000. The total fixed cost is $500. TVC = $3,000 - $500 = $2,500. The average variable cost is $2,500/1,000 = $2.50.

Incorrect. If the average variable cost is $2.00, then the total variable cost will be $2,000. The total revenue is greater than the total cost. The company has positive profits, which cannot be a long-run equilibrium.

$2.00

$2.50

$3.00