Question

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?

Short answer

If the monopolistic rival achieves positive economic profits, the effect on the original businesses profit maximising pricing and output levels invites a response from either current industry firms or firms outside the industry.

Step-by-step solution

Concept introduction

Monopolistic Competition: This is a type of imperfect competition in which a large number of producers sell differentiated items and there is long-term freedom of entry and exit.

Explanation

As long as the initial firm is making positive economic profits, other firms will respond in ways that reduce the original firm's earnings, creating a sense of rivalry.

This will result in a fall in demand for the original firm's products, a decrease in the profit maximising price, and a decrease in the profit maximising output level.

As a result, in monopolistically competitive markets, all firms will eventually receive zero economic profits.