Question

Using appropriate diagrams compare and contrast short-run equilibrium conditions with the long-run equilibrium condition faced by a firm under monopolistic competition.

Answer 1

Answer:

Short-run equilibrium of the firm under monopolistic competition. The firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm no longer sells its goods above average cost and can no longer claim an economic profit.

In the long run, a monopolistically competitive industry will end up in zero-profit-equilibrium. Each firm makes zero profit. The typical firm's demand curve is just tangent to its average total cost curve at its profit-maximizing output.

Features :

Monopolistic competition is different from a monopoly. A monopoly exists when a person or entity is the exclusive supplier of a good or service in a market.

Markets that have monopolistic competition are inefficient for two reasons. First, at its optimum output the firm charges a price that exceeds marginal costs. The second source of inefficiency is the fact that these firms operate with excess capacity.

Monopolistic competitive markets have highly differentiated products; have many firms providing the good or service; firms can freely enter and exits in the long-run; firms can make decisions independently; there is some degree of market power; and buyers and sellers have imperfect information.

Explanation:

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