When the existing firms in a monopolistically competitive industry earn above-normal profit:
A)new firms enter the market,and entry continues until firms earn normal profit.
B)new firms have no incentive to enter the market.
C)new firms have an incentive to enter the market but are legally barred from doing so.
D)they increase their production and lower the price level.
E)their cost structure automatically changes,eliminating the additional profit.

Question

Quizplus · Accepted Answer

When existing firms in a monopolistically competitive industry earn above-normal profit, it indicates that there is demand for the product and consumers are willing to pay a higher price for it. This attracts new firms to enter the market, hoping to also earn profit. The entry of new firms increases competition, which reduces the demand and price for the product. Hence, firms in the market will have to lower their prices to maintain their market share, which eventually leads to normal profit. Therefore, new firms enter the market, and entry continues until firms earn normal profit.

When the Existing Firms in a Monopolistically Competitive Industry Earn