If short-run economic profits are greater than zero for firms in a monopolistically competitive market, in the long run we expect

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Quizplus · Accepted Answer

In the long run, firms will enter the market attracted by the economic profits being made in the short run. This entry will increase the number of competitors, which will lead to a decrease in demand for each firm as there are now more substitutes in the market. As a result, firms will have to lower their prices to sell their products, which will reduce their economic profits. Eventually, in the long run, economic profits will be driven down to zero as firms continue to enter the market. As the number of firms in the market increases, costs such as advertising and marketing will increase, causing average costs to increase as well. Therefore, the average cost of production will increase rather than decrease in the long run in a monopolistically competitive market.

If Short-Run Economic Profits Are Greater Than Zero for Firms