The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
FIGURE 11-4
-Refer to Figure 11-4.Which of the following best describes this industry if all firms have the same cost and revenue curves and are producing output of q0?

Question

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
  FIGURE 11-4
-Refer to Figure 11-4.Which of the following best describes this industry if all firms have the same cost and revenue curves and are producing output of q0?

Quizplus · Accepted Answer

In a monopolistically competitive industry, firms operate with some degree of market power, but face competition from other firms producing similar products. In the long run, firms in this type of market will earn zero economic profits, as entry of new firms will reduce demand for existing firms' products and force them to lower their prices. At the output level q0, the firm in the diagram is operating at a point where its marginal revenue (MR) equals its marginal cost (MC), so it is earning zero economic profits. Therefore, there is no incentive for firms to enter or leave the industry. Choice A is incorrect because firms are not earning positive profits. Choice B is incorrect because if all firms earn positive profits, new firms will be attracted to the industry, causing a shift in the demand curve and reducing profits for existing firms. Choice D is incorrect because moving toward minimum LRAC does not necessarily result in positive profits. Choice E is incorrect because if firms are incurring losses, some firms would exit the industry, causing the demand curve for remaining firms to shift to the right and increasing their market share, eventually leading to zero economic profits in the long run.

The Diagram Below Shows Selected Cost and Revenue Curves for a Firm