Question

1) Compare the characteristics of the monopolistically competitive structure to the purely competitive structure? What is the result of the differences in the long run? Why?

Answer 1

Answer - A monopolistic competitive market is the type of market in which there are large number of buyers and sellers , but the firm is not the price taker as in case of perfect competition.

In perfect competition , the price is constant , whereas in monopolistic market , there is price discrimination i.e different price for different class of buyers.

There is the presence of the perfect substitutes in the perfectly competitive market whereas in the monopolistic market product differentiation takes place .

In perfect competition , the MR curve is parallel to the X axis hence constant . In monopolistic competition the MR curve is downward sloping indicating that higher quantity can be sold by lowering the price.

In the long run , the inefficient firms will exit the perfectly competitive market but in monopolistic market , the firm stay as the consumer is irrational.

The MR = MC = AC = AR in the long run in perfect competition because the firm earns only the normal profits in the long run .

Whereas AR is more than MR and MC thus making the firm earn the some amount of supernatural profits due to the product and price differentiation.