Suppose an industry is monopolistically competitive and some firms are experiencing losses. What happens when transitioning from short-run to long-run equilibrium

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06-12-2019
Business

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Suppose an industry is monopolistically competitive and some firms are experiencing losses. What happens when transitioning from short-run to long-run equilibrium

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sofiasuarez1307 sofiasuarez1307 · Answer 1 · 2019-12-08T18:23:43+01:00

Answer &Explanation:

Firms in monopolist competition maximize profits where the marginal revenue (MR) equals marginal cost (MC). If some firms are experiencing losses in the short-run then, the long run average cost (LRAC) at MC=MR is higher than the price at that same point (gains or losses are the difference between the LRAC and the price). What would happen in the long run is that some firms will leave the market and the new equilibrium would be where the LRAC equals the price and there would be no gains or losses.