What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?
Answers
“Entry of new firms” will become the reason of every firm in the monopoly market to make general profit, just like the competing firm.
Explanation:
- “The entry of new firms” increases the supply of products in this situation the firm's market demand curve will shift to the left. As the penetration in the market increases, the demand curve of the firm will continue to move on till the advantages of this output is not a tangent for the average total cost curve at the maximum level.
- At this point, the financial advantage of the firm is zero, and there is no motivation for new firms to enter the market. Consequently, in the long run and the competition brought about the new entry of firms will become the reason of every firm in the monopoly market, to make general profit, just like the competing firm.
Answer:
The long run time horizon is featured by the free entry and exit of firms. If the firms in the short run are earning abnormal or super normal profits, then, new firms will be attracted to enter the market.
Due to the new entrants, the market supply will increase.
It leads to the reduction in the price that ultimately falls sufficiently to become equal to the minimum of average cost.
When the market price is equal to the minimum of AC, it implies that all the firms earn normal profit or zero economic profit.
On the contrary, if in the short run the firms are earning abnormal losses, then the existing firms will stop production and exit the market.
This will lead to a decrease in the market supply, which will ultimately raise the price.
The price will continue to rise until it becomes equal to the minimum of AC.
‘Price = AC’ implies that in the long run all the firms will earn zero economic profit.
Hence, when the price is equal to the minimum of AC, neither any existing firm will exit nor any new firm will enter the market.