Question

1.

The difference between a monopolistically competitive firm in the short run versus the long run is:

• profit is equal to zero in the long run but not the short run.

• firms only have P > MC in the short run but not the long run.

• firms only produce at MR = MC in the short run.

• firms only have P > MC in the long run but not the short run.

This is true because:

• the industry can be inefficient in the short run but not in the long run.

• firms will enter as long as profits are positive, given enough time.

• firms will be price takers in the long run.

• the industry can be inefficient in the long run but not in the short run.

2.

Welfare losses in monopolistically competitive industries:

• are of great concern to governments.

• can be corrected without reducing the amount of variety offered.

• are small relative to the benefits of variety.

• can easily be corrected through regulation.

Answer 1

1) profit is equal to zero in the long run but not the short run. ( In short run P > ATC , in long run P = ATC )

This is true because : firms will enter as long as profits are positive, given enough time. ( There are low barriers to entry and exit of firms in monopolistically competitive market )

2) Since monopolistic firms set prices higher than marginal costs, consumer surplus is significantly less than it would be in a perfectly competitive market. This leads to deadweight loss and an overall decrease in economic surplus . Dead weight loss can only be corrected or reduced by bringing price closer to MC as in perfect competition .

Answer : are small relative to the benefits of variety.