monopolistic competition

Question 1

what are the characteristics of monopolistic competition in the short run?

Answer 1

product differentiation
many firms
market power
no interaction between firms

Question 2

what are the characteristics of monopolistic competition in the long run?

Answer 2

free entry
entry and exit until zero profit.
product differentiation
many firms
market power
no strategic intervention

Question 3

in the short run can firms make a supernormal profit?

Answer 3

yes in the short run the firms experience supernormal profits due to product differentiation

Question 4

in the long run can firms make supernormal profits?

Answer 4

no in the long run profits equal zero as the short run profits being postive incentivize firms to enter the market so each firms share of the overall market demand falls. each individuals demand curve shifts left and becomes more price elastic. the entry will stop when firms make zero economic profit

Question 5

what does the revenue cost model look like for monopolistic competition in the long run?

Answer 5

the demand curve is tangential to the average total cost curve. the price is greater then the mc curve so a markup exists (not allocatively efficient)

Question 6

what does the revenue cost model look like for monopolistic competition in the short run?

Answer 6

the demand curve is greater then the average total cost curve at the profit maximising point therefore the firms make supernormal profits