Question

A monopolist can earn above normal profit in the long run. true or false

Answer 1

Monopolistic Competition : It is a market situation characterised by fairly large number of firms producing and selling differentiated goods and services. Pure monopoly and perfect competition are rare in practice. The markets that we come accross in our daily life have characteristics of competition and monopoly. Such a market is called monopolistic competition. Monopolistic competition is a comprise of perfect competition and monopoly.

(Q) A monopolist can earn above normal profit in the long run.

(A) False

Long run is the period in which a firm can adjust supply of its products according to its demand. In the long run all factors of production are variable. Therefore, the firm can change its size of plant to any extend. In the short run some firms under Monopolistic Competition might be making supernormal profit. Seeing this supernormal profit, some firms may enter the market in the long run. As a result of the entry of the new firms, the demand for products of the existing firms will come down slowly. Production and supply will increase. Consequently prices will decrease. Therefore, in the long run the supernormal profit disappears.. If a firm is suffering loss in the short period, some firms will leave the industry. As a result, the demand for the existing firms will increase. The production and supply will decrease. Consequently the price increases to the level of AC or slightly above the AC. Now the firm will get normal profit. Thus, it is clear in the long run all firms get normal profit. The free entry and exit drive to normal profit or zero profit in the long run.