Assume a monopolistically competitive firm comes up with a new innovation that allows it to earn above-normal economic profits.Given the nature of the market in which it operates,over time those profits will be competed away as new competitors enter the market.

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Monopolistically competitive markets are characterized by low barriers to entry, which means that new firms can easily enter the market and compete with existing firms. If a firm earns above-normal profits due to an innovation, it will attract new competitors into the market who will try to replicate the innovation or come up with their own innovations. This increased competition will eventually drive down prices and reduce the monopolistically competitive firm's economic profits to normal levels. Therefore, the initial above-normal profits earned by the monopolistically competitive firm are likely to be competed away over time.

Assume a Monopolistically Competitive Firm Comes Up with a New