Answer to Question #274944 in Microeconomics for jeshmita

Question

Why is it the case in a long-run monopolistically competitive equilibrium that the firm’s demand curve is tangent to its average cost curve? Why could it not be a long-run equilibrium if the demand curve “cut through” the average cost curve? 

Answer 1

In a monopolistically competitive market, each firm's demand curve will be tangent to its average cost curve because there is free entry and exit of firms, so firms will enter if there are any economic profits to be earned.