<p>The long-run picture for a firm in monopolistically competitive industry should look like this:</p>

<p><img src="https://i.sstatic.net/esaCk.gif" alt="enter image description here"></p>

<p>The level of production is pinned down by where MR=MC. Price will be equal to AC at that point, so the firm has zero profits.</p>

<p>If the firm was producing at the point where MC=AC, it would have positive profits, which would encourage entry into the industry, shifting the demand in and reducing profits to zero. </p>

CC BY-SA 3.0
2014-12-26T15:09:52.887Z
If by MC=AC, you are referring to the intersection of MC and AC, that would generate negative profits. AR<AC.
Pburg
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2014-12-26T15:32:44.780Z
@Pburg I think profit maximization means that the MR curve would also have to pass trough the point where MC=AC, which means AR (or demand) must lie above it, so AR>AC at that point, indicating positive profits.
dimitriy
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2014-12-26T19:13:57.597Z
I see, my mistake. I thought you were referring to the MC=AC point on the same graph you have included.
Pburg
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2014-12-25T22:26:37.450Z
2014-12-25T22:26:37.450Z
dimitriy
<p>Suppose all firms are monopolistically competitive with constant elasticity of substitution. Can they profit maximize at the quantity point $MC=AC$ (So $P \neq MC$ but $Q$ is set at where $MC=MR=AC$ is established)?</p>

<p>By constant elasticity of substitution, I mean that $\epsilon = -(\partial Q_j/\partial P_i)/(Q_j/P_i)$ is constant for $\forall i \neq j$ where $i,j$ refers to firms, $Q$ refers to quantity, and $P$ refers to price.</p>

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2014-12-24T19:57:00.407Z
What here has the "constant elasticity of substitution" property? Production? Demand? Supply? Revenues? Costs? Please clarify.
Alecos Papadopoulos
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2014-12-24T20:01:37.873Z
Sorry for my omission. Now I clarified.
Gantakata
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2014-12-25T04:12:54.007Z
Your title had a condition on MR, but the question does not. Can you clarify?
dimitriy
CC BY-SA 3.0
2014-12-25T04:21:50.957Z
Clarified. It's just ordinary profit-maximization stuff - in almost all economic structure, firms set their quantity at $MC=MR$ point (it's just first-order condition) - though if firms are not perfect competition type, then $P \neq MC$ - I omitted in the main text because it was so obvious anyway.
Gantakata
<microeconomics>
If all firms in an economy are in monopolistic competition with constant elasticity of substitution, can they profit-maximize at $MC=MR=AC$?
Gantakata
# If all firms in an economy are in monopolistic competition with constant elasticity of substitution, can they profit-maximize at $MC=MR=AC$?

(Asked by: username_0 on 2014-12-24)

Suppose all firms are monopolistically competitive with constant elasticity of substitution. Can they profit maximize at the quantity point $MC=AC$ (So $P \neq MC$ but $Q$ is set at where $MC=MR=AC$ is established)?

By constant elasticity of substitution, I mean that $\epsilon = -(\partial Q\_j/\partial P\_i)/(Q\_j/P\_i)$ is constant for $\forall i \neq j$ where $i,j$ refers to firms, $Q$ refers to quantity, and $P$ refers to price.

**Tags:** microeconomics

> **Comments:**
> **username_1**: What here has the "constant elasticity of substitution" property? Production? Demand? Supply? Revenues? Costs? Please clarify.  
> **username_0**: Sorry for my omission. Now I clarified.  
> **username_2**: Your title had a condition on MR, but the question does not. Can you clarify?  
> **username_0**: Clarified. It's just ordinary profit-maximization stuff - in almost all economic structure, firms set their quantity at $MC=MR$ point (it's just first-order condition) - though if firms are not perfect competition type, then $P \neq MC$ - I omitted in the main text because it was so obvious anyway.  

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## 1 answers

### Answer by username_2 on 2014-12-25. Score: 2

The long-run picture for a firm in monopolistically competitive industry should look like this:

![enter image description here](https://i.sstatic.net/esaCk.gif)

The level of production is pinned down by where MR=MC. Price will be equal to AC at that point, so the firm has zero profits.

If the firm was producing at the point where MC=AC, it would have positive profits, which would encourage entry into the industry, shifting the demand in and reducing profits to zero.

> **Comments:**
> **username_3**: If by MC=AC, you are referring to the intersection of MC and AC, that would generate negative profits. AR<AC.  
> **username_2**: @username_3 I think profit maximization means that the MR curve would also have to pass trough the point where MC=AC, which means AR (or demand) must lie above it, so AR>AC at that point, indicating positive profits.  
> **username_3**: I see, my mistake. I thought you were referring to the MC=AC point on the same graph you have included.  

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