Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. Each firm is so large that its actions affect market conditions. Therefore, the competing firms will be aware of a firm's market actions and will respond appropriately.
Herein, does oligopoly make economic or normal profit?
If an oligopoly is characterized by fierce competition, in long-run equilibrium the firms in the market will earn: A) substantial economic losses. The correct answer was C) zero economic profits. Free entry and exit implies zero profits in the long run.
Also, do oligopolies make supernormal profit? From a welfare point of view, whilst prices are good for consumers, they are not optimal for oligopoly firms, as supernormal profits are wiped out by destructively low prices. Under this type of strategy the monopoly market outcome is reached in the long-run as firms make supernromal profits.
Keeping this in consideration, how do oligopolies affect the economy?
In an oligopoly, a specific industry or sector is controlled by a small number of companies. Oligopolies can excise an unbalanced amount of control over the market, which in turn can lead to artificially-high barriers of entry for new companies, and higher prices for consumers.
How do you calculate profit in oligopoly?
If the dominant firms in an oligopoly can successfully collude to fix prices, then they can be certain of each other's output, which will allow to maximize their profits by producing that quantity of output where marginal revenue = marginal cost, just as it would be for a monopoly.
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