Author Question: Describe the transition from short-run to long-run equilibrium in a monopolistically competitive ... (Read 26 times)

cool · **on:** Jul 1, 2018

Describe the transition from short-run to long-run equilibrium in a monopolistically competitive industry.

What will be an ideal response?

Question 2

Explain why the intersection of the best-response functions is the Cournot equilibrium.

What will be an ideal response?

Carissamariew · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

In the short run, firms in a monopolistically competitive industry may make a positive profit. However, since there are assumed to be no significant barriers to entry, positive profits attract entry. As more firms (or varieties) enter, the demand for each firm (or variety) decreases, and thus prices and profits fall until there is no further incentive for entry.

Answer to Question 2

On a best-response function, a firm selects the profit-maximizing level of output given the level of output it believes the other firm will produce. At the intersection of the best-response functions, what one firm believes the other firm will produce actually is the amount the other firm produces. Thus, neither firm has an incentive to change the level of output.