Explain how economic profits are reduced to zero as new firms enter a monopolistically competitive industry
Influx of new sellers means that each new firm will cut into the demand of the existing firms. That is, the demand curve for each of the existing firms will fall. With entry, not only will the firm's demand curve move inward but it also becomes relatively more elastic due to each firm's products having more substitutes. This decline in demand continues to occur until the average total cost curve becomes tangent with the demand curve, and economic profits are reduced to zero.
You might also like to view...
Why is it that today it is more difficult to categorize countries into the three neat groups like the one that were used in the 1960s
What will be an ideal response?
According to the Keynesian model, the government can increase spending or cut taxes to close a recessionary gap
a. True b. False Indicate whether the statement is true or false
The fair trade movement:
A. attempts to inform and influence consumers' choices. B. is designed to stop unfair trade practices. C. is a set of laws around production processes in other nations. D. a big hindrance to international trade.
Refer to the graph below, which shows the demand and supply of tickets for a Broadway play. At what price is there a shortage of tickets?
a. at $75
b. at $125
c. at $145
d. at all three prices