Assume a monopolistically competitive firm encounters a decrease in average variable cost at all output levels. we would expect:
a. the price to fall and output to rise .
b. the price to fall and output to fall.
c. the price to rise and output to rise.
d. the price to rise and output to fall

The correct answer is option a. "The price to fall and output to rise".

Explanation:

One characteristic of competitive firms is to make decisions based on expected outputs. If a monopolistically competitive firm encounters a decrease in average variable cost at all output levels, we would expect the price to fall and output to rise. A monopolistically competitive firm offers a product that is not easily substituted by products offered by other firms. Therefore when the average variable cost at all output levels decreases, the price of the firm falls but not completely, because the firm is essential for a certain market. The firm would supply the fall in its price by rising its output.

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