Firms in a monopolistically competitive market that earn economic profit in the short run will continue to earn profit in the long run.

Question

Quizplus · Accepted Answer

In the long run, firms in a monopolistically competitive market will face competition from new entrants and from existing firms that adjust their products to capture some of the profit. This competition will drive down the demand for the products of the original firms, reducing their market power and economic profit. Eventually, the firms will only earn enough to cover their costs, meaning that they will not earn economic profit in the long run. Therefore, it is false that firms in a monopolistically competitive market that earn economic profit in the short run will continue to earn profit in the long run.

Firms in a Monopolistically Competitive Market That Earn Economic Profit