Final answer:
Microsoft's consistent profits do not violate the Efficient Market Hypothesis, since EMH is about informational efficiency of markets, not individual firm profitability. Firms in monopolistically competitive markets are expected to earn normal profits in the long run due to entry and exit of firms. Measures like HHI and concentration ratios indictae market concentration but don't directly measure competition.
Step-by-step explanation:
No, Microsoft’s consistent generation of large profits over years does not violate the Efficient Market Hypothesis (EMH). The EMH theorizes that stocks always incorporate and reflect all relevant information, making it impossible to consistently achieve returns that outperform the market average on a risk-adjusted basis. Microsoft’s success does not imply a violation since EMH primarily deals with the informational efficiency of markets rather than the operational efficiency or profitability of individual firms. Moreover, a firm successfully generating profit could be due to its competitive advantages, innovation, and effective business strategies rather than the inefficiency of the market.
Regarding the question about whether firms in a monopolistically competitive market would continue earning economic profits or losses in the long run, we would expect economic profits to attract new firms, and losses would push firms out, leading to a situation where normal profits are made in the long run. This aligns with the concept that monopolistically competitive markets are only able to sustain abnormal profits in the short term due to the entry and exit of firms in the market.
The Herfindahl-Hirschman Index (HHI) and the four-firm concentration ratio are tools used to measure market concentration, which can be an indicator of the level of competition in an industry but does not directly measure the competition itself. These metrics consider factors like market share but do not fully capture all aspects of market dynamics and competitive behavior.