Since in monopolistic competition firms produce differentiated products, prices for them will be determined in the market depending upon their respective demand and cost conditions.

Each firm sets a price and output of its own product. The firm will go on producing until MC=MR. As long as marginal revenue is greater than marginal cost ( MR>MC), the seller will find it profitable to expand his output and when marginal revenue is less than marginal cost ( MR<MC), the firm will not produce.  The firm is in equilibrium where MR=MC and it will be maximizing profits.

Longrun Equilibrium Position.

In the longrun, a monopolistically competitive firm, earns normal profits. It is in equilibrium at a point where marginal revenue is equal to longrun marginal cost. If the price is less than the average cost ( the same as average revenue is less than average cost), the firm will leave the industry because it makes losses. The supernormal profits in the shortrun attract new firms into the industry and eventually profits become zero or normal.

Figure 2.44 longrun equilibrium                     

The firm is in equilibrium at point E producing output Q1 and selling it at price P2. Normal (zero) profits are earned by the firm.  The firm is seen to produce at excess capacity i.e less than optimum output (at the lowest point of the AC curve). Optimum output would be Q2 in the above case, which corresponds with the lowest point of the AC curve. All firms therefore earn normal profits in the longrun.