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HKMO HKMO
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7 years ago
Why can a firm in monopolistic competition make an economic profit only in the short run?
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#1
Staff Member
2 years ago
In the short run, a monopolistically competitive firm maximizes profit or minimizes losses by producing that quantity that corresponds to when marginal revenue = marginal cost. If average total cost is below the market price, then the firm will earn an economic profit.

When price is equal to average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run.
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