Question

Monopolistic competition is more like _____ in the short run and more like _____ in the long run in terms of how much economic profit is earned.

monopoly, oligopoly

monopoly, perfect competition

oligopoly, monopoly

oligopoly, perfect competition

perfect competition, monopoly

perfect competition, oligopoly

Answer 1

Monopolistic competition is more like monopoly in the short run and more like perfect competition in the long run in terms of how much economic profit is earned.

monopoly, perfect competition ("In the short run, a monopolistically competitive firm maximizes profit or minimizes losses by producing that quantity that corresponds to when marginal revenue = marginal cost. If average total cost is below the market price, then the firm will earn an economic profit. If the competitive firms in an industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. More firms will continue to enter the industry until the firms are earning only a normal profit. However, if there are too many firms, then firms will incur losses, especially the inefficient ones, which will cause them to leave the industry. Consequently, the remaining firms will return to normal profitability. Hence, the long-run equilibrium for monopolistic competition will equate the market price to the average total cost, where marginal revenue = marginal cost, as shown in the diagram below. Remember, in economics, average total cost includes a normal profit.")