Answered: in the long run, representative firms…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

in the long run, representative firms in monopolistically competitive markets will just break even --- that is, earn zero economic profits. Yet some firms in highly competitive markets manage to continue to earn economic profits indefinitely. For example, perfumes, cosmetics, and hair care firm L’Oreal, in business since 1907, remains highly profitable today, despite competing in fiercely competitive product categories. How has L’Oreal managed to stay profitable for so long (clue: they have a research and development staff of over 1000 people).

Expert Solution

Step 1

In case of Monopolistically competitive market there are large number of firms which produce goods that are closely related to each other but are not completely identical or similar to each other. There are no restrictions for firms to enter or exit the market. An individual firm is price maker. It can raise the price of a product to some extent and buyers will not refrain from buying them due to product differentiation, brand loyalty and obsession to use a particular product of particular quality and brand. In the long run, new firms enter the market, thus enabling monopolistically competitive firms to break even ie there is no profit or loss. Example includes tootpaste, shampoos, soaps, moisturizers etc.