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# equilibrium in a monopolistically competitive industry

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Carefully explain what will happen as we move from the short run to a long run equilibrium in a monopolistically competitive industry if firms are making a positive profit in the short run. Your explanation should clearly state what will happen to the demand curve facing an individual firm and the reason why this happens.

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First, it is important to know that there is no barriers to entry in a monopolistic competitive market, in other words, firms ...

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equilibrium in a monopolistically competitive industry

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## Monopolistically Competitive Equilibrium

Soft Lens, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses, However the company faces potentially fierce competition from a host of new competitors assume important basic patents expire during the coming year. Unless the company is able to thwart such competition, server downward pressure on prices and profit margins is anticipated.

A. Use Soft Lens's current price, output and total cost data to complete the table.

Price Monthly Total Marginal Total Marginal Average Total
(\$) Output Revenue Revenue Cost Cost Cost Profit
(Million) (\$million) (\$million) (\$million) (\$million) (\$million) (\$million)
\$20 0 \$0
19 1 12
18 2 27
17 3 42
16 4 58
15 5 75
14 6 84
13 7 92
12 8 96
11 9 99
10 10 105

(note: total costs include a risk0adjusted normal rate of return)

B. If cost conditions remain constant, what is the monopolistically competitive high-price/low output long-run equilibrium in this industry? What are industry profits?

C. Under these same cost conditions, what is the monopolistically competitive low-price/high output equilibrium in this industry? What are industry profits?

D. Now assume that Soft Lens is able to enter into restrictive licensing agreements with potential competitors and create an effective cartel in the industry. If demand and cost conditions remain constant, what is the cartel price/ output and profit equilibrium?

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