Question

When does a monopolistic competitor price discriminate to earn positive economic profits? Draw graph

Answer 1

The short run equilibrium profits of monopoly and monopolistic are generally the same. In the long run, however monopolistic competition has normal profits due to entry and exit of firms.

Monopolistic competition has relatively elastic demand as there are alternatives available. It is also clear that differentiated product is a main feature of this market structure.In the shot run when a product is new, firms can charge higher taking benefit of differentiation.

Normal profit is when Marginal revenue= marginal cost.

When firm is able to charge price above average total cost each unit then it has abnormal profits. Profit is shown by shaded area. price charged is above avearge total cost.