assumption precludes economic profits monopolistic competition long run

The assumption that precludes economic profits in monopolistic competition in the long run is that

The difference between the short‐run and the long‐run in a monopolistically competitive market is that in the long‐run new firms can enter the market, which is especially likely if firms are earning positive economic profits in the short‐run. New firms will be attracted to these profit opportunities and will choose to enter the market in the long‐run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically competitive market; hence, it is quite easy for new firms to enter the market in the long‐run.

The monopolistically competitive firm's long‐run equilibrium situation is illustrated in Figure .


The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure . At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Thus, in the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.

Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure . When the firm produces below its minimum efficient scale, it is under‐utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.

____11.Refer to Exhibit 25-3. Total revenue of this profit maximizing monopolisticcompetitor is represented by the area

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____12.Which of the following assumptions do the market structures of monopolisticcompetition and perfect competition share?a.many buyers and sellersb.homogeneous productsc.difficult entry into the marketd.difficult exit from the market

____13.Excess capacity results from a

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____14.If the top four firms account for $25 million in sales and total industry sales are $87million, it follows that the four-firm concentration ratio is

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____15.The key behavioral assumption of the cartel theory is that oligopolists in the industryact as if

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What are the assumptions of monopolistic competition?

The main assumptions are:.
Large number of firms - each firm has an insignificantly small share of the market..
Independence - as a result of a large number of firms in the market, each firm is unlikely to affect its rivals to any great extent. ... .
Freedom of entry - any firm can set up business in this market..

What happens to monopolistic competition in the long run?

In the long run in monopolistic competition any economic profits or losses will be eliminated by entry or by exit, leaving firms with zero economic profit. A monopolistically competitive industry will have some excess capacity; this may be viewed as the cost of the product diversity that this market structure produces.

What is long run equilibrium in a monopolistic competition?

Long Run Equilibrium of Monopolistic Competition: In the long run, a firm in a monopolistic competitive market will product the amount of goods where the long run marginal cost (LRMC) curve intersects marginal revenue (MR). The price will be set where the quantity produced falls on the average revenue (AR) curve.

Can a monopolistically competitive firm earn economic profit in the long run?

Companies in a monopolistic competition make economic profits in the short run, but in the long run, they make zero economic profit. The latter is also a result of the freedom of entry and exit in the industry.

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