Question

Consider the long run equilibrium prediction in monopolistically competitive industries. a. How is the predicted long run similar to the predicted long run in competitive industries? Why, what assumptions do we make about these industries that produce this similarity? b. How is the predicted long run different from the predicted long run in competitive industries? Why, what assumptions do we make about these industries that produce this difference?

Answer 1

1. Both perfectly competitive market and monopolsitc market earn only normal profit or zero economic profit in long run. Firms earm zero economic profit because of free entry and exit.

2. Monopolistic firm marginal revenue is less than price whereas perfectly competitive firm marginal revenue=price because both market have large number of seller and perfectly competitive firms sells homogenous product but  monopolistic firm sells differentiated goods due to which there is an excess capacity for monopolistic firm.