The basic model of pure competition reviewed in this chapter finds that in the l

Question

The basic model of pure competition reviewed in this chapter finds that in the long run all firms in a purely competitive industry will earn normal profits. If all firms only earn a normal profit in the long run, firms will develop new products or lower-cost production methods because they can innovate and possibly earn an economic profit in the short run. improve their management and earn an economic profit in the long run. eliminate competition. innovate and possibly earn a normal profit in the short run. 14) Consider the following statement:

Explanation / Answer

For the first answer: Competition involves the never-ending attempts by entrepreneurs and managers to do better than breakeven (normal profits) by either creating new products or developing lower-cost production methods for existing products. As such, if firms can innovate they can earn economic profit in the short run.

14) If your firm happens to be one of the 10% that succeed you can capture short run economic profits. You may even qualify for a patent on your product which allows you to act as a monopolist for a given amount of time. So, if you can capture enough expected economic profit in the short run to cover your initial investment then it is worthwhile to innovate. (This argument ignores risk. If you add risk to the investment story then you will need to receive additional expected economic profit to undertake the investment to innovate.)

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