Compare and contrast the potential for a perfectly competitive firm and a monopolistically competitive firm to earn positive economic profits in the short run versus the long run. Explain your reasoning
What will be an ideal response?
Both firms can earn positive economic profits in the short run. So long as price is greater than average total cost at the profit-maximizing level of output, a firm will earn a positive economic profit. In the case of both of these types of firms, however, long-run economic profits will equal 0. This is because of the assumption of ease of entry and exit (resource mobility). To be specific, if existing firms are earning positive profits, this will encourage entry by new firms. Entry will continue until all positive profits are competed away and firms are earning an economic profit of 0. At this point there is no incentive for either entry into, or exit from, the market.
You might also like to view...
In the 1950s, crude oil and natural gas imports were restricted to keep the domestic industries viable in case of a war. The rationale for this protection is the ________ argument for protection
A) save domestic jobs B) national security C) anti-dumping D) infant-industry E) penalizing lax environmental standards
Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, the firm's cost function is
A) TC = (w/r) ? q. B) TC = (w + r)/q. C) TC = (w + r). D) TC = (w + r) ? q.
The potential for profit-increasing false advertising is greatest for which of the following goods?
A) disposable diapers B) a refrigerator C) laundry detergent D) spray window cleaner
Jim is haggling with a car dealer on the price of a used car. During the bargaining, Jim discovers that the car has a significant number of scratches which he had not noticed before. The total surplus from the sale has
a. Increased b. Decreased c. Was not affected d. All of the above