What are two real-world complications with the long-run conclusion about the representative firm in the model of monopolistic competition?
What will be an ideal response?
In the long run, the representative firm in monopolistic competition should break even and earn only a normal profit. This conclusion, however, may not be true for all firms in the real world. First, economic profit may accrue in the long run because there may be some degree of monopoly power that is long term. Some firms may earn some economic profits even in the long run if the firm has a product or service that is not easy to duplicate or it has an extremely good location. Second, product differentiation creates a financial barrier to entry that may not be easy to overcome.
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In the long run, a firm in a perfectly competitive market will
A) make zero economic profit, so that its owners earn a normal profit. B) make zero normal profit but its owners will make an economic profit. C) remove all competitors and become a monopolistically competitive firm. D) incur an economic normal loss but not earn a positive economic profit. E) remove all competitors and become a monopoly.
Giffen goods
A) are theoretical and have never been discovered in the real world. B) have not existed since prior to the Industrial Revolution. C) were proven to exist in the 1890s by Sir Robert Giffen. D) were not shown to actually exist until 2006.