Question

1. If a monopolistically competitive firm is earning a normal profit, it:

   	a.	can expect to see more competitors in the future.
   	b.	can expect to see fewer competitors in the future.
   	c.	can expect to see about the same amount of competition in the future.
   	d.	will probably exit from the market.

2.

Both monopolistic competitive and purely competitive firms:

	a.	sell undifferentiated commodities.
	b.	face downward-sloping demand curves.
	c.	earn normal profits in the long run.
	d.	are equally efficient.

Answer 1

Ans) Perfect competition is where there are many sellers selling homogeneous products. Therefore sellers are price takers i.e have no control over the prices.

Monopolistic competition is where there are many sellers selling homogeneous but differentiated products. Due to differentiated products, monopolistic firm has some control over the prices.

In both competitive market and monopolistic market, if firms earn positive economic profit, more firms will enter the market and price will decrease due to increased supply. If firms earn negative economic profit, some firms will exit the market and price will increase due to decreased supply. In either case, in long run, both competitive and monopolistic firm will earn zero economic profit or normal profit.

1) If firms are earning zero economic profit i.e normal profit, there will be no incentive for new firms to enter the market and therefore, it is more likely that the number of firms will remain same.

Option c.

2) Option c.