Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to which factor

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of market power due to product differentiation. However, this leads to the possibility of new firms entering the market and offering similar products which can result in a shift of the demand curve for the incumbent firm. As a result, the long-run profit earned by the monopolistically competitive firm is driven to the competitive level, where the firm earns only normal profits. Thus, answer choice B, which refers to new firms entering the market causing a shift of its demand curve, is the best option.

Long-Run Profit Earned by a Monopolistically Competitive Firm Is Driven