Make a case for why monopolistically competitive industries never reach long-run equilibrium.

Short Answer

Expert verified

Monopolistically competitive industries never reach long-run equilibrium because positive profit in the short run causes free entry of firms and as firms enter, cost of creating high degree of product differentiation becomes greater than the price (price in perfect competition) and tendency to exit market grows.

Step by step solution

01

Step 1. Defintion

A market structure that is a blend of monopoly and perfect competition, with large number of sellers selling differentiated products.

02

Step 2. Reason for not reaching long-run equilibrium

Positive profit in the short run causes free entry of firms but entry of more firms reduces the firm's demand curve and marginal revenue curve, economic profit becomes zero gradually and cost of creating high degree of product differentiation increases, firms tends to exit the market and long-run equilibrium cannot be attained.

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Most popular questions from this chapter

If the firms in a monopolistically competitive market

are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn \(100. If they decide to work together and both lower their output, they can each earn \)150. If one person lowers output and the other does not, the person who lowers output will earn \(0and the other person will capture the entire market and will earn \)200. Table 10.6represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner’s dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj’s earnings first, and Mary's earnings second.)

RAJ MARY
(A) (B)
(\(100,\)100) (\(200,\)0)
(\(0,\)200) (\(150,\)150)

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