Question

Respond to the following questions in 150-200 words (per question):

1. Explain why economic profits are zero in the long run in a monopolistically competitive market.
2. Explain the unique characteristics of the four primary market structures.
3. What are the characteristics of a public good?
4. Discuss the two ways that product differentiation affects the demand for a product.
5. Describe at least five different forms of government intervention in the economy.
6. Explain how these economic concepts currently influence the structure of the American health care system and the policy decision-making process around health care.

Answer 1

Under a monopolistically competitive market, there exists many firm, however each firm produces a differentiated product. Competition exists in the market in the form of free-entry until the profits from each firm's price-cost margins is just covering the fixed costs. In monopolistic competition, every firm enjoys a certain degree of monopoly power. As products are similar and not identical, a firm can take initiative to set a unique price. New firms will necessarily enter a monopolistically competitive market when price exceeds average total cost. Thus earn zero economic profit in the long run because there are no barriers to entry. When under monopolistic competition a firm is earning an economic profit, the new firms in the long run enter the market; produce a similar good, and reducing the demand for the initial firm's good. There is continuation in entry until the firms earn normal profit, which means zero economic profit.