ABNORMAL PROFITS MADE BY MONOPOLISTIC FIRM IN THE SHORT RUN ( AR> AC)

Question 1

One common feature of oligopoly, monopolies and monopolistic comp.

Answer 1

Individual firms are price setters or price makers (each firm has the power to set its own price). it means that these firms face a downward sloping demand curve

Question 2

The downward sloping demand curve

Answer 2

Indicates that to sell more units of a commodity, the industry ill have to lower the price, the MR declines twice as fast as the demand curve

Question 3

review graphs

Answer 3

for both abnormal/losses

Question 4

Analysis for abnormal profit graph

Answer 4

The M.C profit maximizing eq is where MR=MC. This corresponds to a level of output shown by Q1. Given the demand curve (AR), the price which the mon. comp. firm is able to set for this ouput is $10. At this output level, the mon. comp. earns abnormal profit as AR>AC. This abnormal profit is shown by the shaded rectangle

Question 5

At Q* (MC=AC)

Answer 5

is the productively efficient level of output. The MC firm does not produce at that point but rather they produce at lower level of ouput, hence, they are productively and allocatively inefficient. The firm has excess capacity meaning that they have potential to produce at the productive optimum

Question 6

The entry of new firms leads to an

Answer 6

Increase in the supply of diffrenciated products, which causes the firms market demand curve to shift to the left

Question 7

As entry into market increases

Answer 7

The firms demand curve will continue shifting to the left until it is just tangent to the average cost curve at the point maximizing level of output.
At this point, the firms economic profits are zero and there is no longer any incentive for new firms to enter the market. Thus, in the long - run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits just like a perfectly competitive firm

Question 8

Exces capacity

Answer 8

A monopolistically competitive firm end up choosing a level of output that is below its minimum efficient scale. It is under-utilizing its available resources. in this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of monopolistically competitive market structure

Question 9

In the long-run

Answer 9

supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit.

Question 10

Companies in monopolistic competition

Answer 10

will earn zero economic profit in the long run. At this stage, there is no incentive for new entrants in the industry