(Figure: Monopolistic Competition in the Market for Specialty Watches) Use Figure: Monopolistic Competition in the Market for Specialty Watches. The figure represents a monopolistically competitive firm. In the long run firms will:

A)enter this market until all firms earn a zero economic profit.
B)exit this market until all remaining firms earn a zero economic profit.
C)enter this market, leading to excess profit for all of the firms.
D)exit this market, leading to excess profit for all of the remaining firms.

Question

(Figure: Monopolistic Competition in the Market for Specialty Watches) Use Figure: Monopolistic Competition in the Market for Specialty Watches. The figure represents a monopolistically competitive firm. In the long run firms will:

A)enter this market until all firms earn a zero economic profit. 
B)exit this market until all remaining firms earn a zero economic profit. 
C)enter this market, leading to excess profit for all of the firms. 
D)exit this market, leading to excess profit for all of the remaining firms.

Quizplus · Accepted Answer

In the long run, the monopolistically competitive firm will earn zero economic profit due to the entry of new firms and the exit of existing firms. As more firms enter the market, the demand facing each individual firm will decrease, leading to a decrease in its market power and the price it can charge. This will eventually lead to zero profit for all firms in the long run. Therefore, firms will exit this market until all remaining firms earn a zero economic profit.