If monopolistically competitive firms have some control over their prices, why don’t they set price above average total cost so they will realize an economic profit in the long run?
What will be an ideal response?
Entry is relatively easy in monopolistic competition. If a representative firm is earning economic profits in the short run, this condition will not persist as new firms enter the industry with the expectation of earning economic profits. As new firms enter, the demand curve faced by the typical firm will fall and become more elastic which tends to cause the disappearance of economic profits.
Economic profits might persist in a few cases where product differentiation is very strong, or because some firm has some sort of permanent advantage such as location or especially effective advertising.
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After the implementation of the congestion tax in London, traffic volume was reduced and travel time for cars and buses was cut in half. This is an example of
A) caveat emptor. B) comparative advantage. C) responding to incentives. D) the role of pricing in allocating resources.
Which of the following is the best explanation for why the price of gasoline increases during the summer months?
A) Oil producers have higher costs of production in the summer. B) Sellers have to earn profits during the summer to cover losses in the winter. C) There is increased driving by families going on vacation. D) There is less competition among oil refineries in the summer. E) The number of gas stations open 24 hours a day rises in the summer months and so the price must rise to cover the higher costs.