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Chapter 10: Q.9 (page 252)

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?

Short Answer

Expert verified

We cannot expect businesses to make long-term economic profits or losses in a monopolistically competitive market.

Step by step solution

01

Step 1. To determine

Would you expect a monopolistically competitive firm to stay in business in the long run if it is profitable or losing money in the short term?

02

Step 2. Explanation

Monopolistic Competition: This is a type of imperfect competition in which a large number of producers sell differentiated items and there is long-term flexibility of entry and exit.

New entrants will be drawn to a monopolistically competitive business if firms generate economic profits until profits are lowered to zero in the long run.

And if firms in a monopolistically competitive industry are losing money, they will leave the market until earnings reach zero in the long run.

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Most popular questions from this chapter

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.

Will the firms in an oligopoly act more like a

monopoly or more like competitors? Briefly explain.

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?
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