Principles of Economics- Mankiw (5th) 371

Principles of Economics- Mankiw (5th) 371 - CHAPTER 17...

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CHAPTER 17 MONOPOLISTIC COMPETITION 381 To sum up, two characteristics describe the long-run equilibrium in a monop- olistically competitive market: ± As in a monopoly market, price exceeds marginal cost. This conclusion arises because profit maximization requires marginal revenue to equal marginal cost and because the downward sloping demand curve makes marginal revenue less than the price. ± As in a competitive market, price equals average total cost. This conclusion arises because free entry and exit drive economic profit to zero. The second characteristic shows how monopolistic competition differs from mo- nopoly. Because a monopoly is the sole seller of a product without close substi- tutes, it can earn positive economic profit, even in the long run. By contrast, because there is free entry into a monopolistically competitive market, the eco- nomic profit of a firm in this type of market is driven to zero. MONOPOLISTIC VERSUS PERFECT COMPETITION
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