Question

In: Economics

In Chapters 8 -10, we learned about four market structures, perfect competition, monopoly, monopolistic competition, and...

  1. In Chapters 8 -10, we learned about four market structures, perfect competition, monopoly, monopolistic competition, and oligopoly. The following questions will ask you to compare and contrast them.

    1. Explain the zero-profit condition in the long run equilibrium of perfect competition. Why does it occur? Why would firms stay in a market if they can’t make any profit?

    1. Why do we assume the zero-profit condition does not exist for monopoly markets?

    1. The zero-profit condition is assumed for the long run equilibrium under monopolistic competition, all things equal. So explain why it is possible for firms under monopolistic competition to escape the zero-profit condition while it is much less likely under perfect competition.

Solutions

Expert Solution

a) in the long run and in perfect competition all firms earn only normal profit, and this happens because of the assumption of free entry and free exit to the market and homogenous product. as there is free entry in the market, if any one firm makes more profit then all the other firms enter the market and the profit gets divided so there always prevails a zero profit condition or normal profit condition in the perfect competition in the long run. the market stay in the market even if they dont get any profit because they dont face any loss either.

b)zero profit condition doesnot exist for monopoly markets because there is barrier to entry and monopolist is the only seller with 100% market command.

c)The zero-profit condition is assumed for the long run equilibrium under monopolistic competition, all things equal still the monopolist can escape it because of heterogenous product of the market, they can make changes to there product and can attract customers but in case of perfect competition product are homogenous there is no way a firm can make change to the product so the perfect competition firm cannot escape the zero profit assumption.


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