Question

5. Does a monopolistically-competitive firm have zero economic profits in the long run? Why or why not? How might it be different from perfect competition in the long run?

Answer 1

Yes, the monopolistically competitive firm earns zero economic profit in the long run and positive profits in the short run, if they are getting positive profits in the short run other firm would enter the market. There is freedom entry and exit in the markets so in long run other firms will come into the market and this decreases the demand for the existing firms in the market and the demand curve will shift to the left. The firms will keep coming to the market until profit turns zero or normal economic profit in the market. When the profits equal zero , no other firms will not have any incentive to enter the market.

The perfectly competitive firm also earns positive economic profits in the short run and zero economic profits in the long run. The difference is that the perfectly competitive firm always produce on the minimum efficient scale, that is the lowest point on the long run average cost curve. But in the monopolistic competitive firm produces below the minimum efficient scale , so there is a social cost associated with the monopolistically competitive outcome. The firm not utilizing its resources at its maximum and it is called the excess capacity of the monopolistically competitive firm.