Question

In: Economics

The market for laundry detergent is monopolistically competitive. Each firm owns one brand, and each brand...

The market for laundry detergent is monopolistically competitive. Each firm owns one brand,
and each brand has effectively differentiated itself so that it has some market power (i.e., faces a
downward sloping demand curve). Still, no brand earns economic profits, because entry causes
the demand for each brand to shift in until the seller can just break even. All firms have identical
cost functions, which are U-shaped.

(a) Is this market in long-term or short-term equilibrium? Explain your claim?


Now suppose that the government does a study on detergents and finds out they are all alike. The
public is notified of these findings as a result consumers drop allegiance to any particular brand.
As a result of this event, discuss the long-run effects on the laundry detergent market.
Specifically, answer the following questions:

(b) What will be the effect on the demand curve of firms in this market? Why?
(c) How will this event effect the market price of laundry detergent? Explain.
(d) How will each firm’s supply and sales change? Explain.
(e) Does this event increase or decrease the number of firms in this market? Why?
(f) What will happen to total quantity output in the laundry detergent market? Explain.

Please provide graphs when applicable.

Solutions

Expert Solution

a) here as the conditions suggest, the monopolistic firm is in long run equilibrium because in longrun the monopolist always gets normal profit and cannot get supernormal profit because of free entry and free entry of the firms. when any firms make slightly more profit new firms enter the market and the firms excess profit gets dividede between firms.

b) as the consumers are now notified of the fact that the detergents are all the same and there brand loyality will no more stick with one particular firm. so the demand curve will become more elastic or we can say the market will move towards perfect competition.

c) there will be not much of a difference in the market price of the detergent as there is no difference in the detergent and customers are now aware of that fact so if any firms charge slightly high price no one will buy from them so the market price will become uniform for all the firms.

d) all the firms supply curve will be identical and the market share will also be equal as the monopolistic firm is no longer monopolistic and it has become perfect competition because consumers have perfect knowledge about the market and there is free entry and free exit of firms.


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