Which of the following is true about a monopolistically competitive firm?Group of answer choicesIt can earn an economic profit in the short run, but not the long run.It can earn an economic profit in the short run and the long run.It can earn an economic profit in the long run, but not the short run.It cannot earn a economic profit in either the short or long run.
Question
Which of the following is true about a monopolistically competitive firm?Group of answer choicesIt can earn an economic profit in the short run, but not the long run.It can earn an economic profit in the short run and the long run.It can earn an economic profit in the long run, but not the short run.It cannot earn a economic profit in either the short or long run.
Solution
The correct answer is: It can earn an economic profit in the short run, but not the long run.
Here's why:
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In the short run, a monopolistically competitive firm can earn economic profits. This is because the firm has differentiated its product from others in the market, allowing it to have some control over its price. This means it can set its price above its marginal cost, leading to economic profits.
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However, in the long run, these economic profits attract other firms into the market. These new firms also differentiate their products, increasing the competition for the original firm.
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As competition increases, the demand for the original firm's product decreases, causing its demand curve to shift to the left. This reduces the price the firm can charge for its product, decreasing its economic profits.
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Eventually, the firm's price will equal its average total cost, and it will no longer earn economic profits. This is the long-run equilibrium for a monopolistically competitive firm.
So, a monopolistically competitive firm can earn an economic profit in the short run, but not the long run.
Similar Questions
Which statement is true? Group of answer choicesZero economic profits in the long run means that firms make zero accounting profits.Free entry and exit in a competitive industry means that firms make negative economic profits in the long run.A competitive firm in the long run can make positive economic profits.A competitive firm in the long run will always leave the industry as it makes zero economic profits.None of the above.
Which of the following is true for a firm in long-run equilibrium in monopolistic competition? aGiven barriers to entry, the firm earns economic profits in long-run equilibrium. bThere is neither allocative nor productive efficiency. cPrice is greater than average total cost in long-run equilibrium. dThe firm is productively efficient, producing at the minimum of long-run average total cost.
Which of the following statements is NOT correct about perfectly competitive firms: Group of answer choices They will shut down in the short run if they are making economic losses. They cannot sustain positive economic profits in the long run. They will exit the market, in the long run, if they are making economic losses. They will remain in operation in the short run if they are making positive economic profits. They have no control over the market price.
In long-run perfectly competitive equilibrium, which of the following is false?Group of answer choicesThere is efficient, low-cost production at the minimum efficient scale.Economic surplus is maximised.Firms earn economic profit.Economies of scale are exhausted.
Which of the following statements is true regarding profit maximising firms operating in perfect competition?A Firms are productively efficient in the short run and allocatively inefficient in the long runB Firms are dynamically efficient in the long runC Firms are productively and allocatively efficient in the short runD Firms are allocatively efficient in the short run and productively efficient in the long run
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