Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will

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In a monopolistically competitive industry, firms have some degree of market power to set prices above their marginal cost. If firms are earning economic profit, it signals to potential entrants that there is an opportunity for profit in the market. As a result, new firms will enter the industry, leading to an increase in the supply of the product and a decrease in the market price. This will cause a reduction in the profits of existing firms. Therefore, option B is the best choice. Option A is incorrect as there is no incentive for firms to expand production in the short run. Option C is incorrect as firms differentiate their products to create a perceived unique value to consumers. Option D is incorrect as monopolistically competitive firms do not necessarily produce at an allocatively efficient level.

Assume That in a Monopolistically Competitive Industry, Firms Are Earning