Assignment: Professor’s comment reply
Discussion 2- (Microeconomics) Reply to Professor’s comment on initial discussion (Please, answer all of his questions in 100-200 words)
Initial Discussion:
Question 2:
Suppose that A Cleaner World invents a new type of laundry detergent that has an ingredient that stops stains from setting into clothes. If the laundry detergent market is monopolistically competitive, explain what will happen to the price of its product in the short run. What will happen in the long run?
Answer:
In this competition, companies face, as in monopoly, a demand curve with a negative slope. So they have some monopoly power, but that does not mean they cannot get great benefits. The short-term equilibrium shows us that since the company’s product differs from the product of its competitors, its demand curve has a negative slope. The maximizing amount of the benefits is found at the point of intersection of the marginal revenue curves and the marginal cost. As the price is higher than the average cost, the company gets benefits. The long-term equilibrium, the benefits cause the entry of new companies, so the company loses market share and sales, its demand curve shifts downward. This curve is exactly tangent to the curve of the average cost of the company. This implies zero benefits, since the price is equal to the average cost. The company continues to maintain monopoly power, but long-term demand means that the entry of other companies has reduced profits to zero.
Question 4:
Can a monopolistically competitive firm earn large positive profits in the long run? Please explain.
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Answer:
In the monopolistically competitive company the production is lower than the one that minimizes the average cost. The entry of new companies reduces profits to zero in both perfectly competitive and monopolistically competitive markets.
Professor’s Reply and questions:
In question you two, you correctly state that the firm will set MC = MR. We know that any firm in any type of market will always strive to produce where MC = MR, so that is not unique to monopolistic competition. What is more important for this question is what is the relationship between prices (P) relative to MC. Is price greater than, less, than, equal too MC in the short run for a monopolistically competitive firm? What does that relationship indicate?
You also speak of the maximizing “benefit.” What benefit are you referring to in this case?
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