Question

The major difference between monopolistic competition and monopoly is 

A. only a firm in monopolistic competition can earn an economic profit in the short run. 

B. only firms in monopolistic competition are protected by barriers to entry

C. only a monopoly can earn an economic profit in the long run. 

D. how the quantity of output is determined. 

E. monopoly is a price setter and a firm in monopolistic competition is a price taker.

In the long run, firms in monopolistic competition earn zero economic profit because 

A. of over - reliance on product marketing 

B. their demand curves are horizontal.

C. their products are similar but slightly different.

D. firms are free to enter and exit.

E.  of collusion among the various sellers.

Answer 1

Question 1

Option C is correct - Only a monopoly can earn economic profit in the long run.

The major difference between monopolistic competition and monopoly is that, in the long run, in monopoly average revenue (price) is greater than long run average cost and thus it earns positive economic profit. While in monopolistic competition in the long run, due to no barriers in entry and exit of firms, the price equals the long run average cost and thus there is zero economic profit.

Question 2

Option D is correct - Firms are free to enter and exit.

In the long run in monopolistic competition, if there are positive economic profits, new firms will enter the market for gaining profit, which will bring back the profit to zero economic profit and in case of economic losses firms will leave the market to not face losses which will bring back the profit to zero economic profit. Thus in long run, there is zero economic profit because of free entry and exit of firms.

Answer 2

ANSWER :

Option C : Only monopoly can earn economic profit in the long run.

Monopoly and monopolistic  competition, both are price makers. They set price above MC and make economic profit in the short run. In the long run monopoly can continue to make economic profits as there is barrier to enter and exit, but in monopolistic competition there is no barrier to enter and exit and hence it can not make positive economic profit. This means only monopoly can make economic profit in the long run.

Option D : firm are free to enter and exit.

This feature of monopolistic competition is responsible for zero economic profit in the long run. When there are economic profits, new firms enter and economic profit comes to zero and then new entries stop. When there are losses, firms start existing till the economic profit comes to zero.