Author Question: In monopolistic competition, free entry and free exit mean that in the long run firms in the ... (Read 87 times)

shenderson6 · **on:** Jun 29, 2018

In monopolistic competition, free entry and free exit mean that in the long run firms in the industry make zero economic profit.

Indicate whether the statement is true or false

Question 2

Describe the different possible profit outcomes for a perfectly competitive firm in the short run versus the long run. Explain why they occur.

What will be an ideal response?

joshraies · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

TRUE

Answer to Question 2

In the short run, a perfectly competitive firm can make an economic profit, zero economic profit or economic loss. A firm makes an economic profit when P > ATC. It makes zero economic profit (its owners earn a normal profit) when P=ATC. And incurs an economic loss when P < ATC. If firms are making an economic profit, new firms will enter and compete away the existing firms' economic profit until all firms make zero economic profit. At this point, no new firms will enter the market and a long-run equilibrium occurs. If firms are already making zero economic profit, no new firms will enter the market, and this condition continues into the long run. And, if some firms are incurring an economic loss, some will exit the industry. This exit decreases the supply and drives up the price, thereby allowing the remaining firms to make zero economic profit. So, in the long run, a perfectly competitive firm will only make zero economic profit.