Question

If a monopolistically competitive firm has a loss in the short run, some old firms will leave the market due to free _______ and its demand will become less elastic and shift to the right. In the long run equilibrium, there is a __________ since it charges a higher price than marginal cost.

Exit: Excess Capacity

Exit: Mark-up

Entry: Excess Capacity

Entry: Mark-up

Answer 1

Exit: Mark-up

Explanation :

In monopolistic competition there are many firms and free entry and exit in the market. Because firm is leaving industry, it is because there is free exit.

Monopolistically competitive firm faces downward sloping demand curve and marginal revenue curve for monopolistically competitive firm is below the demand curve. And firm maximizes its profit where MR equals MC. And charge price on the demand curve above where MR equals MC. So, always there is markup because of price exceeds MC.

Excess capacity is difference between profit maximising quantity and efficient quantity.