Final answer:
Pure monopolies can drive innovation and efficiency, but may become complacent once behind high barriers to entry. Monopolistically competitive markets, with easier entry, foster variety and market dynamism, leading to a decrease in profit-maximizing price and output levels for the initial firm as competition increases.
Step-by-step explanation:
An argument that the economic profits generated by pure monopolies contribute to dynamic growth focuses on their potential to drive innovation and efficient resource allocation, given the right competitive conditions.
However, this assertion is quite contentious as monopolies may, as John Hicks suggested, prefer a 'quiet life' and may slack off on innovation once they are secure behind high barriers to entry.
Monopolistically competitive markets, by contrast, tend to encourage a greater variety of products and services because positive economic profits act as a signal for other firms to enter the market.
This influx of competitors erodes the original firm's market share, leading to a leftward shift in the firm's perceived demand curve from Do to D₁, and its marginal revenue curve from MRo to MR₁. Consequently, the firm's profit-maximizing price and output levels will decrease.
Over time, the tendency in monopolistically competitive markets is for economic profits to diminish as competition increases, leading to more options for consumers but also potential questions about market efficiency and the optimal level of product variety.