Reading 20: Monopolistic Competition and Oligopoly-LOS b 习题 2011, determine, efficient, economic, center

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Session 5: Economics: Market Structure and Macroeconomic Analysis
Reading 20: Monopolistic Competition and Oligopoly

LOS b: Determine the profit-maximizing (loss-minimizing) output under monopolistic competition, explain why long-run economic profit under monopolistic competition is zero, and determine if monopolistic competition is efficient.

 

 

Under monopolistic competition, companies can earn positive economic profits in:

A) the short run and in the long run.

B) neither the short run nor the long run.

C) the short run but not in the long run.

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In a market characterized by monopolistic competition, companies can earn positive economic profits in the short run if the price of their product is greater than the average total cost of producing it. In the long run, because barriers to entry are low, economic profits will attract new entrants. Additional producers will drive the price lower until price equals average total cost, economic profit is zero, and new competitors no longer have an incentive to enter the market.

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When a firm is earning positive economic profits in a monopolistic competitive market, what will most likely occur?

A) New firms will enter driving down the economic profits to zero.

B) Losses will occur in the short run.

C) Price takers will be over run by price searchers.

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New firms will enter a monopolistic competitive market with economic profits above zero and will absorb some market demand. This will shift the demand curve down to the point where price equals average total cost and there are zero economic profits.

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In the short run, price searchers maximize profits by producing output where marginal revenue (MR):

A) equals marginal costs (MC) and charging a price based on the average total cost (ATC) curve.

B) equals marginal costs (MC) and charging a price based on the demand curve.

C) is greater than marginal costs (MC) and charging a price based on the demand curve.

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Price searchers maximize profits by producing an amount of output where MR equals MC and charging a price based on the demand curve. In the short run, profits or losses occur depending upon where the individual firm’s ATC curve is in relationship to the demand curve. In the long run, economic profits are zero due to the low barriers to entry. Important note for the test: regardless of whether a firm is a price taker, price searcher, monopoly, or oligopoly, all firms will seek to maximize profits and want to produce the ouput where marginal revenue equals marginal cost.