When new firms choose to enter monopolistically competitive markets:
A) there must be little diversity of products in the market.
B) they are guaranteed economic profits upon entry.
C) some firms in the market must be making economic profits.
D) the demand curve faced by an established firm will shift to the right as a result.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms can earn economic profit in the short run due to the differentiation of products. When a new firm enters the market, it increases the competition and puts pressure on existing firms, forcing them to reduce their prices and profits. Therefore, for a new firm to enter, there must be some existing firms making economic profits for the new firm to have a chance of earning a profit in the short run. Options A and B are false because monopolistically competitive markets are characterized by product differentiation, and firms cannot guarantee economic profits. Option D is also false because a new firm's entry may increase the supply in the market, causing the demand curve of existing firms to shift to the left, reducing their profits.

When New Firms Choose to Enter Monopolistically Competitive Markets