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JAMB Economics 2005 Question 6

Question 6

Market Structures

In the long run, the equilibrium point of a monopolistic firm is a point where the

  1. A.marginal cost cruve is tangential to the average fixed cost curve
  2. B.demand curve is tangential to the average variable cost curve
  3. C.supply curve is tangential to the marginal cost curve
  4. D.demand curve is tangential to the average cost curve
Show the answer and explanation

Answer: D (demand curve is tangential to the average cost curve)

Explanation

In the long run new firms enter until only normal profit is left, so the firm's demand (AR) curve just touches its average cost curve.