If monopolistically competitive firms have some control over the prices they charge, why do they experience zero economic profits in the long run?
What will be an ideal response?
The key is the relatively easy entry into monopolistically competitive markets. If a typical firm is experiencing economic profits in the short run, new firms will enter the market, reducing the demand and increasing the price elasticity for the typical firm's product. This process will continue as long as there are economic profits-that is, competition will force economic profits to zero in the long run.
You might also like to view...
The Central Bank of Baltonia decided to lower the interest rate that banks use to make loans to each other when the growth rate of Baltonia's output fell. What will be the effect of this policy on Baltonia's economy?
What will be an ideal response?
If two steel firms decide to merge, this merger would be classified as:
a. a horizontal merger. b. a vertical merger. c. a conglomerate merger. d. either a vertical or conglomerate merger depending on the nationality of the companies. e. either a vertical or conglomerate merger depending on the market shares of the two companies.
Table 30.1 Number of workers (per hour)Total output (per hour)Marginal physical product (output per worker)Total revenue (dollars per hour)Marginal revenue product (dollars per hour worker)14---________---210________________________315________________________419________________________522________________________Assume that the product price is $4 per unit and that the hourly wage for workers is $12. Neither price nor wage changes with output. In Table 30.1, the marginal revenue product of the second worker hired is
A. $6 per hour. B. $24 per hour. C. $4 per hour. D. $40 per hour.
Exhibit 17-3 Aggregate demand and aggregate supply curves
As shown in Exhibit 17-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the economy to move:
A. from E1 to E2 initially and then eventually move back to E1. B. directly from E1 to E2 and then remain at E2. C. directly from E1 to E3 and then remain at E3. D. from E1 to E2 initially and then eventually move to E3.