If a monopolistically competitive firm is earning profits in the short run:

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have differentiated products and some degree of market power, but they still face competition from other firms. If a firm is earning profits in the short run, it indicates that there is not enough competition in the market to drive prices down to the point where firms are earning zero economic profits. This creates an incentive for other firms to enter the market and compete away the profits of the existing firm. Therefore, the correct answer is C - other firms have an incentive to enter the market. Option A is incorrect because in the long run, barriers to entry will be eroded as new firms enter the market, and competition will increase. Option B is incorrect because monopolistically competitive firms do not act like perfectly competitive firms - they have some market power due to product differentiation. Option D is incorrect because exiting the industry would lead to a loss of potential profits that could be earned in the short run.

If a Monopolistically Competitive Firm Is Earning Profits in the Short