In a monopolistically competitive market with negative economic profits,
A)Firms will enter until accounting profits are zero.
B)Firms will enter until economic profits are zero.
C)Firms will exit until economic profits are zero.
D)No entry or exit will occur.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market with negative economic profits, firms are unable to cover their costs sufficiently. Therefore, in order to decrease the negative economic profits, some firms will exit the market until the economic profits are zero. In this scenario, firms will not enter the market as the negative economic profits serve as a deterrent factor. Hence, option (C) is the best choice.

In a Monopolistically Competitive Market with Negative Economic Profits