Author Question: How does a firm in monopolistic competition decide whether to operate at a loss or shut down in the ... (Read 74 times)

skymedlock · **on:** Jun 29, 2018

How does a firm in monopolistic competition decide whether to operate at a loss or shut down in the short run?

What will be an ideal response?

Question 2

Economists will often argue that an individual trade barrier designed to help a particular industry will work even though on net it won't help the economy as a whole. Explain what this means.

What will be an ideal response?

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

Answer to Question 1

A firm in monopolistic competition will continue to operate in the short run as long as the price it charges is sufficient to cover variable costs. If it is not, the firm will shut down and suffer losses equal to its fixed costs. Incidentally, this rule applies to a firm operating in any type of market structure.

Answer to Question 2

It's possible that the industry that the trade barriers were designed for will benefit. However, because the trade barrier will inevitably drive costs up to other firms in other industries it is possible that the economy as a whole may not benefit. Also, by restricting trade in one industry a nation is also reducing the income creating potential of its trading partners which will reduce its own ability to export goods and services as well.