Question

Compare the levels of economic profits in a long-run equilibrium for a perfectly competitive firm, a monopoly, a monopolistically competitive firm, and an oligopoly. Economic profits will most likely be:

A. Zero in perfect competition and positive in monopoly, monopolistic competition and oligopoly
B. Zero in perfect competition and monopolistic competition, perhaps positive in a monopoly and perhaps positive in oligopoly
C. Zero in perfect competition, monopolistic competition, and oligopoly and perhaps positive in monopoly
D. Zero in all four market models
E. Positive in all four market models

Answer 1

In long-run equilibrium, perfectly competitive and monopolistically competitive firms earn zero economic profit due to new entries, while monopolies and oligopolies may retain positive profits due to barriers and potential collusion. B is the correct answer.

Step-by-step explanation:

When comparing the levels of economic profits in a long-run equilibrium across different market structures, we see distinct differences. In a perfectly competitive market, firms earn zero economic profit in the long run, as any profit opportunities are eliminated by new entrants, which leads to the price equaling marginal costs. Monopolies, however, are able to maintain positive economic profits due to barriers to entry that protect their market power.

In the case of monopolistic competition, firms may earn economic profits in the short run, but in the long run, entry and exit of firms will also push these profits to zero.

Similar to perfect competition, the entry of new firms erodes any above-normal profits. Lastly, the situation with oligopolies can vary. Depending on the extent of collusion and barriers to entry, oligopolies may sustain positive economic profits in the long run.