Question

Show a firm that is earning zero economic profits, but has some market power. Then, assume this market power is entirely eliminated when a new competitor enters the market with the same technology and produces a perfect substitute. Showing in your diagram how the firm must adjust its production level to most effectively compete with the new entering firm, explain why maintaining competition is important.  

Answer 1

Monopolistic competition in the long -run:-A firm that is earnings zero economic profits situation can be explaine by monopolistic competition in the long run.The difference between the short-run and long -run in a monopolistic is that new firms can enter the market, and earn positive economic profits. The entry of new firm leads to increase in the supply of different products which causes shifts in the demand curve to the left. At this point,the firm earn's zero profit.
Diagram -1
Entry of a new competitor with same technology and produces a perfect substitute.So the remaining firms have to adjust its production level to most effectively to compete with the new entering firm.
By using advertising and different packing system to maintain the competition.And competition is very important, because it increase the quality of product and create healthy competition.