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8. Suppose the only long-run adjustment is free entry or exit of firms. What is the...

8. Suppose the only long-run adjustment is free entry or exit of firms. What is the difference between the short-run equilibrium conditions faced by a perfectly competitive firm and a monopolistically competitive firm? How about thelong-run equilibrium conditions?

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Answer #1

If there's a market boom in the industry, in the short run a perfectly competitive as well as monopolistically competitive firm can get to make huge amount of profits and the short run equilibrium prices are such a way that it brings more profits to the firm's. However, in the long run due to the free entry and exit of firms, the supply will gradually increase with which the profit of the firm's reduce and finally they settle down to run at zero economic profits on the whole.

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