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Chapter 10: Q. 15 (page 252)

Make a case for why monopolistically competitive industries never reach long-run equilibrium.

Short Answer

Expert verified

Monopolistically competitive industries never reach long-run equilibrium because positive profit in the short run causes free entry of firms and as firms enter, cost of creating high degree of product differentiation becomes greater than the price (price in perfect competition) and tendency to exit market grows.

Step by step solution

01

Step 1. Defintion

A market structure that is a blend of monopoly and perfect competition, with large number of sellers selling differentiated products.

02

Step 2. Reason for not reaching long-run equilibrium

Positive profit in the short run causes free entry of firms but entry of more firms reduces the firm's demand curve and marginal revenue curve, economic profit becomes zero gradually and cost of creating high degree of product differentiation increases, firms tends to exit the market and long-run equilibrium cannot be attained.

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