Question

both perfect competitors and monopolistic competitors?

1. earn zero economic profit in the long run?

2. use marginal cost pricing?

3. experience product differentiation?

4.find prices pushed to the min of long-run ATC by entry

Answer 1

1. Both perfect competitors and monopolistic competitors earn zero economic profits in the long run. Their price in the long run equals average total cost of production in the long run.
2. The perfectly competitive firm equals their price equal to the marginal cost whereas the monopolistic competitor does not and their price is higher than the marginal cost of production.
3. The perfectly competitive firm sells a product which is homogeneous. All firms sell perfectly substitutable product where no differentiation is possible. The monopolistic competitor on the other hand sells differentiated product. The products are close substitutes but not perfect substitutes.the products are differentiated on the basis of quality, size shape, brand etc.
4. On entry of new firms in the market in perfectly competitive industry, the price ultimately tends to equal minimum of average total cost of production. In monopolistic competitive industry, however, the price tends to equal average total cost but not at the minimum of ATC. Thus the monopolistic competitor is not efficient. the monopolistic competitor produces less than perfectly competitive firm and charges more than the perfectly competitive firm.