Answer to Question #132425 in Microeconomics for Neba

Question

Describe how long run equilibrium of monopolistically competitive firm achieved according to:
A) equilibrium with price competition model
B) equilibrium with entry and exit of firms model

Answer 1

long run equilibrium occurs when production aspects are variable and there is no fixed factor and therefor maybe adjusted to shifts in demand . The behavior of suppliers in a monopilstic competition will be the same in the long run .

In the equilibrium with price competition model its assumed that the number of companies available in the industry are compatible with long run equilibrium thus avoiding the entry and exit and the ruling price is higher than the equilibrium one .Equilibrium is achieved when prices changes are not reactionary to deliberate reductions by competing firms and only happens when the companies act independently

 equilibrium with entry and exit of firms model

This model assumes that companies are aimed at maximizing abnormal profits margins .These abnormal profits attract new entrants thus resulting to a downward shift in the demand curve as the market share as shared among many sellers .If the new entries will not make a change in the cost curves, there will be a price adjustment as the demand curve shifts to the left as a new equilibrium position is established by the frim thus equating marginal cost to the new marginal revenue. The equilibrium will occur when the exceed profits are wiped out and the tangent of demand is equal to the cost curve . Here the price will be equal to the cost as there are no abnormal profits .Therefore no new entry into the industry thus making the demand curve stable as ;owering /increasing the price may cost the company