Chapter 12R, Problem 23MCQ

To determine

The correct option that will happen in long run if firm earns economic profit in short-run.

Answer to Problem 23MCQ

Option a is correct.

Explanation of Solution

Explanation for correct option:

a.

If the firm is earning economic profit in short-run then it means that firm is charging prices higher than the marginal cost. The other firms will attract and enter the market due to which the demand of existing firm will decline. So, the demand curve will shift towards the left in long run. Therefore, option a is correct.

Explanation for incorrect options:

b.

Firm M’s profit will decrease in long run as new firms will enter. Therefore, option b is also incorrect.

c.

In long run, other firms will enter as existing firms are earning profit in short-run. Therefore, option c is incorrect

d.

Non-price competition refers to the competition where firms try to increase their sales by advertising or other means. It is still possible. Therefore, option d is incorrect.

e.

In monopolistic competition, price differentiation can be done in long-run also. Therefore, option e is incorrect.

Economics Concept Introduction

Monopolistic market structure: Market structure where there are many firms selling identical but products with different features. There are low barriers to entry and exit which allows firms to enter the market easily.