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Consider the market for sunglasses
Consider the market for sunglasses. Some firms sell glasses that are polarized, others sell darker or lighter shades, and still others sell mirrored glasses.
a. What is the likely market structure and why do you think that?
b. Suppose a firm enters with a new tinted glass. If the firm makes a profit, what is likely to happen over the long run? Briefly explain what happens to the firm's profits and why.
Expert Solution
a. What is the likely market structure and why do you think that?
The market structure reflects the features of a monopolistic competition comprising of many buyers and many sellers and selling differentiated products.
b. Suppose a firm enters with a new tinted glass. If the firm makes a profit, what is likely to happen over the long run? Briefly explain what happens to the firm's profits and why.
When the new firms enter the market, the firm tends to make a profit in the short run owing to the fact that the consumer wants to try new and innovative products. Over the period of time, since there are no restrictions on the entry, firms enter into the production of these products and in the long run all firms earn a normal profit. Hence, the profits of the new firm are dropped down in the long run.
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