Why does a firm in monopolistic competition earn zero economic profit rather than an economic profit in the long run?
What will be an ideal response?
Entry into monopolistically competitive markets is easy because there are no barriers to entry. So when firms in monopolistic competition have an economic profit, other firms are attracted to enter the industry, thereby decreasing profits for everyone. Entry continues as long as there is an economic profit so, in the long run when all entry is completed, the firms earn zero economic profit.
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What is price discrimination? Give examples of price discrimination
What will be an ideal response?
Suppose a risk-neutral competitive firm must produce output before the market price is known. If the uncertain price is given by p = p* + e, where e is a random term with an expected value of zero, a competitive firm should shut down in the short run if:
A. p* < AFC. B. p* < AVC. C. p* < MC. D. p* + e < AFC.