Question

Assume that you are the manager of toothpaste-X, a monopolistic competitive firm. You have differentiated your product and are making positive profits. The positive profits are an incentive to other firms for entering the market. Use a profit equation to explain how the entering of other firms to the market affects your firm performance and what you would do to continue making positive profits.

Answer 1

The profit maximizing point is when the marginal revenue is equal to the marginal cost hundred this point profit is equal to that of

(P-ATC)*Q which is the profit equation where p stands for price,. ATC stands for average total cost and Q stands for optimal quantity and because there isno barrier for entry in the monopolistic competition and if the profit is positive this will turn as a positive motivation for people to enter the market as a result of which supply of similar product increases and substitute products also increase as a result of which the price should be lowered and in this regard, and profits would reduce and in order to continue making positive profits in monopolistic competition the only better way is to engage in high amount of differentiation with superior quality products and ensure brand loyalty among the people so that the profit levels will not affect much with more entry