In a monopolistically competitive industry,

Question

Quizplus · Accepted Answer

In a monopolistically competitive industry, firms engage in product differentiation to create a perceived difference between their products and those of their competitors. This can lead to some degree of market power and the ability to charge higher prices, resulting in economic profits in the short run. However, because there are few barriers to entry, new firms can easily enter the industry, increasing competition and driving prices down. As a result, firms in a monopolistically competitive industry can only earn zero economic profit in the long run. If firms are earning an economic profit, it signals to potential entrants that there is profit to be made in the industry, and new firms will enter until the profits are competed away. Therefore, choice (C) is the best answer.

In a Monopolistically Competitive Industry