Do you agree that companies under perfect competition as well as monopoly are making profits in...

Do you agree that companies under perfect competition as well as monopoly are making profits in the long run? If yes, why? If not, why not?

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Expert Solution

Ans. 1. = No, Under Perfect Competition, firm earns only Normal Profits means Zero Economic Profit but Under Monopoly, Firm earns Super Normal Profits in Long Run.

a) Suppose in Short Run, Perfectly competitive firms earns super normal Profits then In Long Run, more and more firms would get attracted towards this profit making industry -> It would Increase the Supply in the Industry -> As supply increases prices would go down -> Hence, Super Normal profits would become Normal Profits in Long Run.

Firms in Perfectly Competitive Market earns Normal Profits, due to the Free Entry and Exit of the Firms.

b) But in Monopoly, firms may maintain to earn Super Normal Profits even in Long Run.

As profits depend on Level of Competition, If there is Less Competition then Profits would be Higher and If there is High Competition then Profits would be Lower.

There is Less or No Competition in Monopoly due to the Restrictions on Entry and Exit of New firms.

Rahul Sunny answered 2 months ago

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