Suppose that a typical firm is receiving economic profits in the short run in a monopolistically...

Suppose that a typical firm is receiving economic profits in the short run in a monopolistically competitive industry. Carefully explain what will happen in the long run to:

the number of firms

the demand curve facing each firm

price individual firm output and industry output

economic profits or losses

Solutions

Expert Solution

In the monopolistically competitive market, price is equal to the ATC in the long run and there is a free entry of other firms in case it is profitable

the number of firms- Increases as profits are positive, more firms enter

the demand curve facing each firm - decreases as supply increases

price individual firm output and industry output- price decreases to the ATC, firms output decreases and total industry output will increase

economic profits or losses - the firms earn zero economic profits as supply increase will cause the price to decrease to the ATC so that total revenue = total cost and the firms will break even.

Rahul Sunny answered 2 years ago

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