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Chapter 15: Problem 7

"In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit." Do you agree with this statement? Explain your reasoning.

Short Answer

Expert verified
In conclusion, we disagree with the statement that both a monopolistic competitor and a monopolist will always make a profit. In the short run, a monopolistic competitor's profit is uncertain and can vary, while a monopolist is more likely to make a profit due to their significant market power. In the long run, a monopolistic competitor will typically earn zero economic profit, and a monopolist can maintain a positive economic profit if they are protected from competition. Therefore, the statement is not accurate for both types of firms in short and long run.

Step by step solution

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1. Understanding the market structure of monopolistic competition and monopoly

Monopolistic competition refers to a market structure where many firms sell products that are similar but not identical. Each firm has a certain degree of market power, and they compete by product differentiation, advertising, and pricing. A monopoly is a market structure where a single firm has complete control over the supply of a product or service. They have significant market power and can set prices or output levels without fear of competition.
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2. Short-run profit for a monopolistic competitor

In the short run, a monopolistic competitor can earn a positive economic profit, break-even, or incur losses. This is because they have some market power without being a sole controller of the market. They can differentiate their products, and thus, raise prices to a certain degree to make a profit. However, entry or exit of firms in the industry is still possible in the short run, and thus, the competitor's profit can be influenced by the changes in the competitive landscape, forcing them to adjust.
03

3. Long-run profit for a monopolistic competitor

In the long run, a monopolistic competitor typically earns zero economic profit, as other firms would enter or exit the market in response to any positive or negative economic profit. The entry or exit of firms leads to changes in demand and supply, eventually driving profits to zero. Monopolistic competitors operate at an output level where marginal cost equals marginal revenue but may face excess production capacity in the long run, which means that resources could be used more efficiently.
04

4. Short-run profit for a monopolist

In the short run, a monopolist can typically make a positive economic profit, as they have complete control over the production and supply of a product and can charge prices above their marginal costs. Due to their significant market power, there is no perfect substitute for consumers, which allows the monopolist to maintain higher prices and higher profits.
05

5. Long-run profit for a monopolist

In the long run, a monopolist can maintain their positive economic profit as long as there are no significant threats from substitutes or potential entrants, thanks to high entry barriers. Factors such as a lack of close substitutes, economies of scale, or government regulations can protect the monopolist from competition, thus enabling them to sustain their market power and profits in the long run.
06

6. Conclusion

Based on the above analysis, we disagree with the given statement. In the short run, neither a monopolistic competitor nor a monopolist is guaranteed to always make a profit, though it is more likely for monopolists. In the long run, while the monopolist can maintain positive economic profit if sufficiently protected from competition, a monopolistic competitor will typically only earn zero economic profit due to market adjustments.

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Most popular questions from this chapter

The local hairdresser industry has the market structure of monopolistic competition. Your hairdresser boasts that he is making a profit and that if he continues to do so, he will be able to retire in five years. Use a diagram to illustrate your hairdresser's current situation. Do you expect this to last? In a separate diagram, draw what you expect to happen in the long run. Explain your reasoning.

In each of the following cases, explain how the advertisement functions as a signal to a potential buyer. Explain what information the buyer lacks that is being supplied by the advertisement and how the information supplied by the advertisement is likely to affect the buyer's willingness to buy the good. a. "Looking for work. Excellent references from previous employers available." b. "Electronic equipment for sale. All merchandise carries a one-year, no- questions-asked warranty." c. "Car for sale by original owner. All repair and maintenance records available."

"In the long run, there is no difference between monopolistic competition and perfect competition." Discuss whether this statement is true, false, or ambiguous with respect to the following criteria. a. The price charged to consumers b. The average total cost of production c. The efficiency of the market outcome d. The typical firm's profit in the long run

Magnificent Blooms is a florist in a monopolistically competitive industry. It is a successful operation, producing the quantity that minimizes its average total cost and making a profit. The owner also says that at its current level of output, its marginal cost is above marginal revenue. Illustrate the current situation of Magnificent Blooms in a diagram. Answer the following questions by illustrating with a diagram. a. In the short run, could Magnificent Blooms increase its profit? b. In the long run, could Magnificent Blooms increase its profit?

The restaurant business in town is a monopolistically competitive industry in long-run equilibrium. One restaurant owner asks for your advice. She tells you that, each night, not all tables in her restaurant are full. She also tells you that she would attract more customers if she lowered the prices on her menu and that doing so would lower her average total cost. Should she lower her prices? Draw a diagram showing the demand curve, marginal revenue curve, marginal cost curve, and average total cost curve for this restaurant to explain your advice. Show in your diagram what would happen to the restaurant owner's profit if she were to lower the price so that she sells at the minimum-cost output.
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