Question

Firm X is a monopolistic competitor that produces Good X. If the market for Good X...

Firm X is a monopolistic competitor that produces Good X. If the market for Good X was perfectly
competitive, would it have charged the same price and earned the same amount of profit that it
does now? Explain your answer with the help of relevant diagrams.

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Answer #1

Monopolistically firm operates when MR = MC where equilibrium point is E while perfectly competitive firm operate when P = MC at equilibrium point of E1. As monopolitically firm charge higher price and there are limited number of firms in the market, they will earn higher profits as compared to perfectly competitive. There is no barrier to enter to enter in the market in perfectly competitive firm, new firms will enter in the market after observing short run profit which will reduce veeryone's profit and force every firm to operate at normal profit level.

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