Asked by morgan lewallen on May 02, 2024
Verified
Refer to Figure 15.4. In the long run in this monopolistically competitive industry,
A) some firms will leave the industry until the remaining firms earn a normal profit.
B) firms will leave the industry until each firm earns a positive economic profit.
C) firms will enter the industry, which will increase the demand for the product.
D) the government will subsidize the firms to eliminate any losses the firms incur.
Monopolistically Competitive
This refers to a market structure where many companies sell products that are similar but not identical, allowing for some degree of market power and product differentiation.
Economic Profit
The difference between a firm's total revenues and its opportunity costs, representing the additional gain over what could have been earned in the next best alternative.
Normal Profit
The minimum level of earnings needed for a company to remain in business, often considered as the company's opportunity cost.
- Understand the market dynamics of monopolistic competition in both short and long runs.
- Analyze the impact of entering and exiting firms on industry profits and economic profits.
Verified Answer
HL
Howard LobsterMay 03, 2024
Final Answer :
A
Explanation :
In the long run, firms in a monopolistically competitive industry will experience entry and exit until they earn only a normal profit. This is because if firms are making economic profits, new firms will enter the market, increasing competition and driving down prices and profits. Conversely, if firms are incurring losses, some will exit the market, reducing competition and allowing the remaining firms to increase prices and return to normal profit levels. Options B, C, and D do not accurately describe the long-run equilibrium in a monopolistically competitive market.
Learning Objectives
- Understand the market dynamics of monopolistic competition in both short and long runs.
- Analyze the impact of entering and exiting firms on industry profits and economic profits.