Figure 8.1
-Profits for the monopolistically competitive firm depicted in Figure 8.1

Question

Quizplus · Accepted Answer

In the long run, monopolistically competitive firms face entry and exit. As new firms enter the market, the demand for the incumbent firms' products decreases, reducing their market power and reducing their ability to charge higher prices. This leads to a decrease in profits in the long run. This is depicted in Figure 8.1, where the short-run profits are indicated by the distance between P and ATC, and long-run profits are indicated by the distance between P and LRATC. As the firm adjusts to the long-run equilibrium, its profits decrease from π1 to π2. Therefore, choice C is the correct answer.

Figure 8.1 -Profits for the Monopolistically Competitive Firm Depicted in Figure 8.1