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Under which market Condition firms make only normal profits in the long run?
  • a)
    Oligopoly 
  • b)
    Monopoly 
  • c)
    Monopolistic competition 
  • d)
    Duopoly
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Under which market Condition firms make only normal profits in the lon...
Monopolistic Competition:
Monopolistic competition is a market structure characterized by a large number of firms selling similar but differentiated products. In the long run, firms in monopolistic competition make only normal profits.

Product Differentiation:
One key feature of monopolistic competition is product differentiation, where firms differentiate their products through branding, packaging, quality, or other factors. This allows firms to have some degree of market power and control over the price of their products.

Zero Economic Profits:
In the long run, firms in monopolistic competition tend to make zero economic profits. If a firm is making above-normal profits, new firms will be attracted to the market due to low barriers to entry. This increased competition will drive down prices and reduce profits to a normal level.

Competition and Pricing:
Due to the large number of firms in monopolistic competition and the ease of entry and exit, competition ensures that prices are kept in check. Firms cannot charge prices significantly above their costs as consumers have the option to switch to competing products.

Long-Run Equilibrium:
In the long run, firms in monopolistic competition reach a point where they are making normal profits. This occurs when each firm's average total cost is equal to the price it charges for its product. Any deviation from this equilibrium will result in adjustments by firms to remain competitive.
In conclusion, firms in monopolistic competition make only normal profits in the long run due to the characteristics of the market structure that promote competition, product differentiation, and zero economic profits.
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Under which market Condition firms make only normal profits in the long run?a)Oligopolyb)Monopolyc)Monopolistic competitiond)DuopolyCorrect answer is option 'C'. Can you explain this answer?
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