Suppose that in the short run firms are making economic profit in ...

[neverstopbelieb]

Suppose that in the short run firms are making economic profit in a monopolistically competitive industry. Explain what will eventually happen in the long run.
 
  In your answer make sure to discuss demand, price and the relationship between price and average total cost.

Question 2

Explain the infant industry argument case against free trade.
 
  What will be an ideal response?

[wilsonbho]

Answer to Question 1

In the long run firms will be attracted to the industry. Entry will cause the demand curve faced by each individual firm to shift inward and become more elastic as consumer find that there are more substitutes. This will continue until the demand curve becomes tangent with average total cost. At this point price will just equal to average total cost and all of the firms in the industry will be enjoying normal profit. The industry in now in a long-run equilibrium situation since there is no incentive for further entry.

Answer to Question 2

The argument is that a young industry that may need temporary protection from competition from the established industries of other countries to develop an acquired comparative advantage.

[neverstopbelieb]

Thank you

[wilsonbho]

Happy to help you