Question

Are the profits made by Baskin Robbins Ice Cream Company really an economic profit or are...

Are the profits made by Baskin Robbins Ice Cream Company really an economic profit or are they an implicit cost -- a royalty due to Mr. Robbins for creating 31 flavors? Asked differently, how do economists explain how/why firms in monopolistic competition break even?

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Answer #1

In monopolistic competition, entry and exit are free. So, if firms are making short run economic profit so that the price (obtained by MR = MC rule) is higher than ATC, it attracts new entry. As new firms enter, individual firm's demand keeps falling until each firm earns zero economic profit (breaks even). Similarly, if firms are making short run economic loss so that the price (obtained by MR = MC rule) is lower than ATC, it causes exit of some firms. As some firms exit, individual firm's demand keeps rising until each firm earns zero economic loss (breaks even).

Therefore, break-even is explained by free entry and exit.

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