Question

 

Consider a competitive market for a consumer product. Suppose this product goes out of fashion with consumers. How will this sudden drop in popularity affect the profit of an individual firm in this market in the long run? Choose one:

 

 

A The profnt of an individual firm increases from a smaller positive value to a larger positive value in the long run.

B. The profht of an individual firm increases from zero to a positive value in the long run.

C. The profit of an individual firm decreases from zero, and the firm will incur a loss in the long run.

D. The profit of an individual firm stays at zero in the long run.

Answer 1

1. D) The profit of an individual firm stays at zero in the long run.

2. Monopoly:

1) one seller

2) Significant barriers to entry and exit

Perfect Competition:

1) Free entry and exit

2) similar products

3) Price equals MR

Monopolistic Competition:

1) Low barriers to entry and exit

2) Possible short run profit but no long run profit

3) Differentiated products

Perfect Competition is a form of market structure in which there is free entry and exit of firms and firms are selling homogeneous and identical products in the market. Firms under this form of market are price takers rather than price makers. Industry determines the equilibrium price from the demand and supply curve intersection. Sellers can sell any unit of commodity at that price and firms does not have any price control over the commodity. If one seller try to charge higher price then it will lose all his customers because all firms are selling similar products in every respect like color, shape, brand, etc.

Monopoly is a form of market in which there exist only a single seller who sold goods which does not have close substitutes. There is barrier in the entry of new firms. Under monopoly, the firm is a price maker because it can fix the price for its product. It has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. It means that the firm will have to reduce the price to increase its sale. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes.

Monopolistic competition refers to a market situation in which there are large number of buyers and sellers. The sellers sell closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the most important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under monopolistic competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic. Example: Firms producing different brands of shampoos like Sunsilk, Pantene, Head & Shoulders, Dove etc. Monopolistic competition combines the features of monopoly and perfect competition.