Principles of Economics- Mankiw (5th) 373

Principles of Economics- Mankiw (5th) 373 - CHAPTER 17...

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CHAPTER 17 MONOPOLISTIC COMPETITION 383 How is this markup over marginal cost consistent with free entry and zero profit? The zero-profit condition ensures only that price equals average total cost. It does not ensure that price equals marginal cost. Indeed, in the long-run equilibrium, monopolistically competitive firms operate on the declining por- tion of their average-total-cost curves, so marginal cost is below average to- tal cost. Thus, for price to equal average total cost, price must be above marginal cost. In this relationship between price and marginal cost, we see a key behavioral difference between perfect competitors and monopolistic competitors. Imagine that you were to ask a firm the following question: “Would you like to see another customer come through your door ready to buy from you at your current price?” A perfectly competitive firm would answer that it didn’t care. Because price ex- actly equals marginal cost, the profit from an extra unit sold is zero. By contrast, a
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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