Question

1. In monopolistically competitive markets, the property of free entry and exit suggests that

1. the market structure will eventually be characterized by perfect competition in the long run.
2. all firms earn zero economic profits in the long run.
3. some firms will be able to earn economic profits in the long run.
4. some firms will be forced to incur economic losses in the long run.

2. If, to begin, a market is perfectly competitive, and then it is taken over by three or four firms, we would expect, as a result,

1. an increase in market output and an increase in the price of the product.
2. an increase in market output and an decrease in the price of the product.
3. a decrease in market output and an increase in the price of the product.
4. a decrease in market output and a decrease in the price of the product.

Answer 1

Answer-1. Correct option is 'B'

In monopolistically competitive markets, the property of free entry and exit suggests that all firms earn zero economic profits in the long run. The long run characteristic of a monopolistically competitive market are almost same as a perfectly competitive market. A firm making profits in the short run will nonetheless only breakeven in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit.

Answer-2. Correct option is 'C'

If, to begin, a market is perfectly competitive, and then it is taken over by three or four firms, we would expect, as a result, a decrease in market output and an increase in the price of the product. When it taken over by three or four firms it will be an oligopoly market structure. An oligopoly is a market structure wherein a market or industry is dominated by small group of large seller. Oligopolies can result from a various form of collusion that reduce market competition which then typically leads to higher price for the consumer. As a result of increase in price, the decrease in market output.