If firms in a monopolistically competitive industry are earning economic profits,then in the long run

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms are able to differentiate their products to some extent. When firms in such an industry earn economic profits, it attracts new firms to enter the industry, as they can also produce close substitutes. This entry will continue until the market demand is more evenly spread out among the firms, and the economic profits are eliminated in the long run. Therefore, option A is the correct answer. Option B is incorrect because entry into a monopolistically competitive market is relatively easy. Option C is incorrect because firms in this market differentiate their products to some extent, so new firms cannot simply produce the exact same product. Option D is incorrect because there's no indication that the government will intervene in a monopolistically competitive market where firms are earning economic profits.

If Firms in a Monopolistically Competitive Industry Are Earning Economic