In the LONG run, monopolisitc competition: Charges a price above marginal cost and earns zero economic profits OR charges a price equal to marginal cost and earns zero economic profits?
Charges a price above marginal cost and earns zero economic profits
This q is from BSAS, and the solution below is from Schweser: Assume the scenario of a long-run equilibrium for a representative firm after new firms have entered the market. The entry of new firms shifts the demand curve faced by each individual firm down to the point where price equals average total cost (P = ATC) such that economic profit is zero. At this point, there is no longer an incentive for new firms to enter the market and long-run equilibrium is established. The firm in monopolistic competition continues to produce at the quantity where MR = MC, but no longer earns positive economic profits. DOESN’T THAT JUST SAY THAT P = ATC? I’m confused.
Dreary, don’t you think when the price is above the MC, it results an economic profit?
well… the important thing to remember here that price > MR in the case of firms in monopolistic compentiton. So Dreary, you are right.
there is econ profit in the short run, the competition jumps in, and price is reduced to MC, and then there is no econ profit. that’s why I’m confused. The answer according to BSAS is CHARGE A PRICE ABOVE MC AND EARN ZERO ECONOMIC PROFITS
i think that in LR equilibrium for monopolistic competition, LRATC=MC=MR…anyone confirm that?
no profit = zero economic profit in this context.
I think it’s agreed that there is no (or zero) econ profit. What I’m confused about is price, which in the long run is equal to MC, but according to BSAS price is above MC in the long run. back to the drawing board
I’m not sure about that, I think in S.T. P>MC, but long term P=MC.
In the SR: Q is set where MR=MC But P is set > MC (which is > ATC) -> Eco Profit In the LR: P=ATC -> 0 Eco Profit (just like in perfect comp, but better bcse we have divesification of products)