Hey can someone please explain why firms under monopolistic competition produce at an output below that which minimises average cost per output in the long run. Kindly reply.
Firms will maximise profits where MR = MC, so this is the quantity they will typically choose to produce. Firms operating under monopolistic competition face a downward-sloping demand (AR) curve, and the MR curve will then also be downward sloping and twice as steep, so AR > MR. As there are no barriers to entry, in the long run, the firms will not make supernormal profits, ie AR = AC. So the firm produces where MC = MR < AR = AC, ie MC < AC. But, as is always the case, the MC curve cuts the AC curve at its minimum point, so AC is minimised where AC = MC, hence any point where AC <> MC is not a minimum. Have a look at the diagram at the bottom of page 4 of Module 8 in the Course Notes - this illustrates these relationships.
