Chapter 15, Problem 7P

To determine

Profit earned by a typical monopolist and monopolistic firm in the long and short.

Concept Introduction:

Monopolistic Competition An imperfect market competition where there are large numbers of sellers selling differentiated product and is called the monopolistic competition. It exhibits the elements of both a monopoly and perfect competition. The defining characteristics of the market are- It has a large number of firms, relative free entry and exit of firms, product differentiation, imperfect information, transportation costs, inelastic demand and inefficient production.

Monopolist- A market with a single seller and its identity is well protected by significant restrictions on entry of new firms into the production of the unique product are characterized as a monopoly. The monopolist is the sole seller in the market and enjoys the power of being the price setter.

Normal and Supernormal profit An entrepreneur is a factor of production whose profit is his income. This incentive keeps him in business. It is an integral part of the cost structure of the firm and is aggregated with rent, wages, interest and other explicit expenses to define the cost of production. Any profit over and above this implicit cost paid as remuneration to the producer, is the supernormal profit.