In the long run, a representative firm in a monopolistically competitive industry will end upMultiple Choicehaving an elasticity of demand that will be less than it was in the short run.having a larger number of competitors than it will in the short run.producing a level of output at which marginal cost and price are equal.earning a normal profit, so zero economic profit.
Question
In the long run, a representative firm in a monopolistically competitive industry will end upMultiple Choicehaving an elasticity of demand that will be less than it was in the short run.having a larger number of competitors than it will in the short run.producing a level of output at which marginal cost and price are equal.earning a normal profit, so zero economic profit.
Solution
In the long run, a representative firm in a monopolistically competitive industry will end up earning a normal profit, so zero economic profit.
Here's why:
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In the short run, firms in monopolistic competition can make super-normal profits. This is because they have some degree of market power that allows them to set their own prices.
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However, in the long run, these super-normal profits attract new firms into the market. This increases competition and reduces the demand for the existing firms' products.
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As demand falls, these firms will reduce their output and prices to stay competitive. This process continues until all super-normal profits are eroded away.
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Therefore, in the long run, firms in monopolistic competition will only earn a normal profit, which is zero economic profit. This is because all the costs, including opportunity costs, are covered.
Similar Questions
Use the following graph for a perfectly competitive firm to answer the next question. The firm isMultiple Choiceearning a normal (zero economic) profit.earning an economic profit.generating a loss, but should continue to produce in the short run.generating a loss and should shut down in the short run.
Firms in long-run equilibrium in a perfectly competitive industry will produce at the low points of their average total cost curves becauseQuestion 2Select one:a.firms seek maximum profits and to do so they must choose to produce where average costs are minimized.b.firms maximize profits and free entry implies that maximum profits will be zero.c.free entry implies that long-run profits will be zero no matter how much each firm produces.d.firms in the industry desire to operate efficiently.
Which statement is true? Group of answer choicesZero economic profits in the long run means that firms make zero accounting profits.Free entry and exit in a competitive industry means that firms make negative economic profits in the long run.A competitive firm in the long run can make positive economic profits.A competitive firm in the long run will always leave the industry as it makes zero economic profits.None of the above.
Which of the following is true about a monopolistically competitive firm?Group of answer choicesIt can earn an economic profit in the short run, but not the long run.It can earn an economic profit in the short run and the long run.It can earn an economic profit in the long run, but not the short run.It cannot earn a economic profit in either the short or long run.
If firms in a perfectly competitive industry are earning economic profits (select all that apply), We expect firms in this industry to earn smaller economic profits in the future. We expect to see higher cost firms exit this industry to seek greater return on their capital in other markets. We expect new producers to stop entering the market when market price equals minimum average total cost. Consumers' willingness to pay above market rates will create inefficiency in long-run production.
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