In the long run, a monopolistically competitive firm
A)makes an economic profit.
B)charges a price that is above average total cost.
C)has a horizontal demand curve.
D)becomes a monopoly.
E)makes a normal profit.

Question

Quizplus · Accepted Answer

In the long run, a monopolistically competitive firm will only earn a normal profit. This is because there is free entry and exit in the market, meaning that if firms are earning economic profits, new firms will enter the market, increasing competition and driving down profits. Conversely, if firms are earning losses, some firms will exit the market, reducing competition and allowing the remaining firms to earn a normal profit. Therefore, in the long run, the average total cost will be equal to the price, and the firm will only earn a normal profit.

In the Long Run, a Monopolistically Competitive Firm