Why can long-run profit be zero while price remains above MC with differentiated products?
Entry shifts each firm’s demand until it is tangent to ATC, while downward slope preserves markup.
Follow the cause and effect
Each firm faces downward demand for its variety.
Choose q where MR=MC and read price.
Profit induces entry until P=ATC while generally P>MC.
The model you are using
Conditions for this model
Approximately free entry; real cafés are an illustration, not an empirical claim that all satisfy the model.
The exam trap
Zero profit does not imply P=MC or make products homogeneous.
Connect the reasoning to the graph
What changes
- In the long run, demand is tangent to ATC left of minimum ATC, creating excess capacity.
What stays fixed
Approximately free entry; real cafés are an illustration, not an empirical claim that all satisfy the model.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Profit induces entry until P=ATC while generally P>MC.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Draw how entry shifts an incumbent’s demand and MR to the long-run tangency.