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Question 21M.1.HL.TZ1.2a

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Date May 2021 Marks available [Maximum mark: 10] Reference code 21M.1.HL.TZ1.2a
Level HL Paper 1 Time zone TZ1
Command term Explain Question number a Adapted from N/A
a.
[Maximum mark: 10]
21M.1.HL.TZ1.2a
(a)

Explain why a monopolistically competitive firm can make economic (abnormal) profit in the short run, but not in the long run.

[10]

Markscheme

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

  • definitions of monopolistic competition, economic (abnormal) profit, short run, long run
  • diagram of a monopolistically competitive firm that makes economic profit in the short run by producing the quantity of output where MR=MC and price is lower than ATC; diagram of a monopolistically competitive firm that makes normal profit in the long run by producing the quantity of output where MR=MC and price is equal to ATC
  • explanation that in the long run the economic profit will disappear, because the lack of barriers to entry in the industry will allow the entrance of new firms, which will attract customers away from existing firms (decreasing the demand)
  • examples of monopolistically competitive markets in practice (e.g. restaurants, legal and tax services, dental care).
Examiners report

Quite a few candidates did not know the exact characteristics of monopolistic competition and were not able to make the link between these characteristics and the inability to make abnormal profit in the long run. 

Syllabus sections