Answer to Question #178493 in Microeconomics for Risav Ganguly

Question

Using appropriate diagrams compare and contrast short-run equilibrium conditions with the

long-run equilibrium condition faced by a firm under monopolistic competition.

Answer 1

In the short-run equilibrium the firm maximizes its profits and produces a quantity where the firm's marginal revenue (MR) is equal to its marginal cost (MC). The firm is able to collect a price based on the average revenue (AR) curve. The difference between the firm's average revenue and average cost, multiplied by the quantity sold (Qs), gives the total profit.

In the long-run equilibrium the firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (MR and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit.