In the first graph below, illustrate the cost curves and demand conditions for a monopolistic ally competitive firm making short-run profits. In the second graph, illustrate what those conditions are most likely to be in the long run. Explain the major

differences in the two graphs.

What will be an ideal response?

In the short run, the firm can earn economic profits. In the long run, the potential for economic profits will be reduced as other firms enter the industry or compete more intensively with product differentiation and development. Only a normal profit is likely to be earned in the long run. Price will also be greater than the minimum of average cost.