Figure 16-1. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-1.If the ATC=20 at the profit-maximizing level of output,which of the following will occur in the long run in this industry?

Question

Figure 16-1. The figure is drawn for a monopolistically competitive firm.
 
-Refer to Figure 16-1.If the ATC=20 at the profit-maximizing level of output,which of the following will occur in the long run in this industry?

Quizplus · Accepted Answer

Since the firm is earning positive economic profits in the short run, new firms will enter the industry in the long run. This will increase competition and decrease demand for each firm's product, leading to a decrease in price. As a result, the firm's demand curve will shift downward, and the firm will need to decrease its output level to maximize profits. This decrease in output will lead to an increase in average total cost, making it difficult for the firm to earn positive economic profits in the long run. Therefore, firms will exit the industry to eliminate excess capacity and restore equilibrium in the long run.