Scenario: Monopolistically Competitive Firm A monopolistically competitive firm's demand for its product is equal to Q = 160 - P, and its MC curve is equal to MC = 20 + 2Q.Its TC curve is as follows: TC = 20Q + Q₂ + 20.
(Scenario: Monopolistically Competitive Firm) Given the information in the scenario Monopolistically Competitive Firm, in the long run, this firm can expect that:
A)its demand curve will become more elastic as it dominates the market more.
B)its economic profits will decrease to zero.
C)its losses will fall and eventually become a positive economic profit.
D)other firms will not enter or exit the industry.

Question

Quizplus · Accepted Answer

In the long run of a monopolistically competitive market, firms will continue to enter the industry until economic profits are driven to zero. The given TC curve includes fixed costs represented by Q₂ and it will not change in the long run. Therefore, as new firms enter the market and increase competition, the demand curve for this firm will shift leftward, causing a decrease in price and subsequently reducing economic profits. Ultimately, this firm can expect to earn zero economic profits in the long run. Therefore, option B is the correct answer. Option A is incorrect because as the firm dominates the market, it will have more pricing power, making its demand curve less elastic. Option C is incorrect because the given information does not indicate any factors that would cause losses to eventually turn into positive economic profits. Option D is incorrect because as demand decreases and economic profits decrease, firms will exit the industry, allowing remaining firms to have more market power.

Scenario: Monopolistically Competitive Firm a Monopolistically Competitive Firm's Demand for Its