Question

Above: Kalteen sells 250 units for $12 each and the firm faces an average total cost of $4, what is Kalteen's profit?

If Kalteen from the above question sells its output in a monopolistically competitive market structure, what will happen in the long run?
A. profit will not change in the LR due to high barriers to entry
B. firms will exit the market, D and MR will decrease, and profit = zero
C. firms will exit the market, D and MR will increase, and profit = zero
D. firms will enter the market, D and MR will decrease, and profit = zero
E. firms will enter the market, D and MR will increase, and profit = zero

Answer 1

Kalteen's profit is $2000. In a monopolistically competitive market, firms will enter the market in the long run, reducing demand and marginal revenue for each existing firm, and profit will trend towards zero.

Step-by-step explanation:

For Kalteen that sells 250 units at $12 each, the total revenue (TR) is calculated by multiplying the price per unit by the number of units sold, so TR = 250 units * $12/unit = $3000. The total cost (TC) is found by multiplying the average total cost by the number of units, so TC = 250 units * $4/unit = $1000. This means that Kalteen's profit is TR - TC, which is $3000 - $1000 = $2000.

If Kalteen operates in a monopolistically competitive market, in the long run, we expect that economic profits will attract new firms to the market, until the economic profit is eroded away. So, the correct answer is D. firms will enter the market, Demand (D) and Marginal Revenue (MR) will decrease, and profit = zero. This is because new entrants increase the supply, which typically lowers the market price until no firms are making economic profit.