In the long run, there is no different k , olistic competition and prefect compe
ID: 1194758 • Letter: I
Question
In the long run, there is no different k , olistic competition and prefect competition." Discuss whether this statement is true, false, or ambiguous respect to the following criteria. The price charged to consumers The average total cost of production The efficiency of the market outcome The typical firm's profit in the long run "In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit." Do you agree with this statement? Explain your reasoning.Explanation / Answer
(6)
(a) False.
perfect competitor equates price with marginal cost (MC), but monopolistic competitor equates Marginal revenue (MR) with MC & then determines price from demand curve which lies above MR curve, both in short & long run. So, perfect competitor has a lower price.
(b) True
In both cases, long run excess profits are eroded because both types of firms produce at a price that equals its lowest point of ATC.
(c) False
Perfect competitor's price is lower & output is higher, so it is more efficient.
(d) True
Entry caused by short run profit erodes any excess profits in the long run, for a typical firm.
(7) The statement is wrong.
While both types of firms equate MR with MC to derive at their price, monopolist is the single seller in market. So in long run also, it continues to make excess profits. But entry is free in monopolistic competition, so excess short run profits attract more new firms, which eventually erode short run excess profits until the long run excess profit of typical firm is zero.
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