Explain how much profit one can expect when competing in a market structure of monopolistic competition.

Expert Solution

In a monopolistic competition what happens is that your product is differentiated and there is free market entry and exit where there are no barriers and because your product is differentiated people create brand value to the product if you like it as a result of which the demand curve is not horizontal like a perfectly competitive market as a result of which it is rather downward-sloping and this gets to result in profit maximizing output at marginal revenue = marginal cost and because the demand curve is downward sloping why the marginal revenue curve is below the demand curve you can price your product higher than the marginal revenue so that you earn positive profits on the whole but in the long run what happens is that due to more entry of firms and your differentiated product might not be protected by it as a result of which it can earn zero profit in the long run which is called normal profit condition

Rahul Sunny answered 2 years ago

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