Do you agree that companies under monopolistic competition can have a profit in the long run?If...

Do you agree that companies under monopolistic competition can have a profit in the long run?If yes, why? if no, why not?

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Expert Solution

In a monopolistically competitive market firms maximize profits by producing at a point where marginal revenue is equal to marginal cost ( MR =MC ) . So like monopolies they are price makers and make profits in the short run . While a monopolistic competitive firm can make a profit in the short-run , the effect of this kind of pricing will cause a decrease in market demand in the long-run .

This increases the need for firms to venture into product differentiation , leading to an increase in average total cost of production . The decrease in demand and increase in cost causes the long run average cost curve to become tangent to the demand curve at the good’s profit maximizing price . Hence :

First, that the firms in a monopolistic competitive market will produce a surplus in the long run . Second, the firm will only be able to break even in the long-run; owing to decrease in demand and increase in costs it will not be able to earn an economic profit .

Rahul Sunny answered 1 year ago

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