Question

"In the long run, there is no difference between monopolistic competition and perfect competition." True, false, or ambiguous?

Discuss this statement with respect to the following:
a. The price charged to consumers
b. The average total cost of production
c. The efficiency of the market outcome
d. The typical firm’s profit in the long run

Answer 1

In perfect competition, the price charged to consumers is equal to the marginal cost of production. Firms produce at the minimum of their average cost curve in perfect competition. In monopolistic competition, firms have some degree of market power and can set prices higher than marginal cost.

Step-by-step explanation:

a. The price charged to consumers: In perfect competition, the price charged to consumers is equal to the marginal cost of production because firms have no market power. In monopolistic competition, however, firms have some degree of market power and can set prices higher than marginal cost. Therefore, the price charged to consumers can be different in the long run for the two market structures.

b. The average total cost of production: In perfect competition, firms produce at the minimum of their average cost curve, leading to efficient production. In monopolistic competition, firms do not produce at the minimum average cost, resulting in higher average total cost of production.

c. The efficiency of the market outcome: Perfect competition leads to both productive efficiency (producing at the lowest possible average cost) and allocative efficiency (producing the quantity where marginal cost equals marginal benefit). Monopolistic competition, on the other hand, does not achieve productive efficiency due to firms' pricing decisions and the lack of perfect competition.

d. The typical firm’s profit in the long run: In perfect competition, firms earn zero economic profit in the long run as they compete away any abnormal profits through entry and exit. In monopolistic competition, firms may earn positive economic profit in the long run due to their slightly differentiated products and market power.

Answer 2

The statement regarding the lack of differences between monopolistic competition and perfect competition in the long run is ambiguous. While both market structures may lead to normal profits in the long term, they differ in pricing, production efficiency, and market outcome efficiency.

Step-by-step explanation:

The statement '"In the long run, there is no difference between monopolistic competition and perfect competition.'" is ambiguous because there are both similarities and differences in certain aspects:

• a. The price charged to consumers: In perfect competition, firms sell products at a price level determined by the lowest point on the average cost curve, which typically means price equals marginal cost. In monopolistic competition, however, firms have some control over pricing due to product differentiation and sell at prices above marginal cost.
• b. The average total cost of production: In a monopolistic market, firms typically do not produce at the lowest average total cost due to the downward-sloping portion of the average cost curve they operate on, in contrast to perfect competition where firms do produce at the lowest average total cost.
• c. The efficiency of the market outcome: Perfect competition leads to productive and allocative efficiency, whereas monopolistic competition generally does not achieve such levels of efficiency.
• d. The typical firm’s profit in the long run: Both market structures generally lead to normal profits in the long run due to the process of entry and exit. However, short-term profits may be higher in monopolistic competition due to brand differentiation.