Exercises · Q10
Q.What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?
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Start your 14-day free trial to unlock the full solution →Free entry competes away supernormal profit (demand curves shift left) and free exit removes losses (demand curves shift right); adjustment ends only at zero supernormal profit.
A firm in monopolistic competition operates in a market with a large number of firms and free entry and exit. This free movement of firms is what forces long-run profit to zero:
- If firms earn supernormal profit in the short run, the profit attracts new firms into the industry. As new firms enter, some customers shift from existing firms to the newcomers, so each existing firm's demand curve shifts leftward, and the price it can charge — and hence its profit — falls. This continues until supernormal profits are wiped out. …
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