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Like monopolies, monopolistically competitive firms face downward sloping demand curves, but cannot earn long-run economic profits....

Like monopolies, monopolistically competitive firms face downward sloping demand curves, but cannot earn long-run economic profits. (T/F) Explain your reasoning.

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Answer #1

True.

  • A monopolistically competitive market is a market structure characterized by large number of firms selling differentiated products.
  • These firms face a downward sloping demand curve just like the monopolies but only earn short run economic profits while the long run Economic profits are absent in this market.
  • In the short run, these firms earn very High economic profits, which provides Incentives for other new firms to enter the market.
  • Entry of new firms will eventually start to decrease the profits earned by each of the firm in the market as the demand starts to fall and the average costs Increases.
  • This shows that a monopolistically competitive firm earns zero Economic profits in long run.
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