Answer the following questions comparing monopolistic competition to perfect competition. I. In the long run, how...

Answer the following questions comparing monopolistic competition to perfect competition.

I. In the long run, how does the profit earned by a firm operating in a monopolistically competitive market compare to the profit the same firm would earn if it were instead operating in a perfectly competitive market?Please explain.b. In the long run, how does the average cost of production for a firm operating in a monopolistically competitive market compare to the average cost of production for the same firm if it were instead operating in a competitive market?Please explain.

II. b. In the long run, how does the average cost of production for a firm operating in a monopolistically competitive market compare to the average cost of production for the same firm if it were instead operating in a competitive market? Please explain.

Solutions

Expert Solution

SOLUTION:-

ANSWER-1

In short run the monopolistic firm would be earning economic profit due to unique product sold in the market. the AR would be greater than the ATC and the margin would be economic profit the firm is earning but in long run the ATC would be tangent to AR curve and due to entry of new firms the firms would be earning normal profit and operating at break even point same as perfect competitive market., futhermore the AR curve in perfect competition is parallel to horizontal axis but in monopolistic competition the AR curve is downward sloping because sale a firm would have to decline the price of marginal units.

ANSWER-2

In long run the monopolistic firm's ATC would be tangent to AR curve which would represent break even point. in perfect competition the ATC = MR = AR it would also represent break even point. the main difference is that in monopolistic competition the firm has kept excess capacity to eliminate the decreasing return to scale, but this would be applicable for some time and eventually the firm's total cost would be equal to perfectly competitive firm.

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Rahul Sunny answered 1 year ago

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