In a monopolistic competitive industry, short-run economic profit encourages entry of new firms until there are no economic profits in the long-run.

Question

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In a monopolistic competitive industry, there is freedom of entry and exit, which means that new firms can enter the industry if they see the opportunity to earn economic profit. As new firms enter, the market becomes more competitive, which reduces the market power of existing firms and reduces their economic profit. This process continues until all firms earn only normal profit in the long-run. Therefore, short-run economic profit encourages entry of new firms until there are no economic profits in the long-run.

In a Monopolistic Competitive Industry, Short-Run Economic Profit Encourages Entry