Question

We would expect an oligopolist earning short-run economic profits to____

A) Also earn long-run economic profits
B) Shut down in the long run
C) Break even in the long run
D) Lose money in the long run

Answer 1

An oligopolist earning short-run economic profits is expected to only break even in the long run due to increased competition which drives prices down and leads to zero economic profits. The correct answer is option A. and C.

Step-by-step explanation:

We would expect an oligopolist earning short-run economic profits to break even in the long run. In a monopolistically competitive market, firms that earn economic profits in the short run will not typically continue to do so in the long run. This happens because other firms are attracted to the profits and enter the market, which increases competition and drives down prices. As a result, long-run equilibrium is reached where firms earn zero economic profits due to the increased competition, a concept sometimes referred to as 'cutthroat competition'.

In perfect competition, a similar process unfolds as firms enter or exit the market, leading to economic profits being driven down to zero. Essentially, the original oligopolistic firm's increased output and decreased price will eventually lead to no remaining profits, and the firm will only break even in the long run where average cost equals demand.