In the long run, firms in monopolistic competition make zero economic profit because

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, there are many firms selling similar but slightly differentiated products. As a result, each firm has a downward-sloping demand curve, but they also face competition from other firms. In the long run, if a firm is making a positive economic profit, this will attract new firms into the industry, which will increase the supply of similar products and decrease the demand for each firm's product. Firms will then have to lower their prices to remain competitive, leading to lower economic profits. Similarly, if firms are making a negative economic profit, some firms will exit the industry, which will decrease the supply of similar products and increase the demand for each remaining firm's product. Firms will then be able to increase their prices and earn a positive economic profit. In the long run, however, firms will continue to enter and exit the industry until each firm is making zero economic profit, meaning that they are earning enough revenue to cover their costs but are not making any extra profit. Therefore, the best answer is E: firms are free to enter and exit.

In the Long Run, Firms in Monopolistic Competition Make Zero