In the long run,monopolistically competitive firms earn zero economic profits because

Question

Quizplus · Accepted Answer

In the long run, monopolistically competitive firms can earn economic profits in the short run due to product differentiation and some degree of market power. However, these profits attract new firms to enter the market, which increases competition and decreases the demand and price for each firm's product. As a result, firms have to lower their prices and their profits are driven to zero in the long run. This process continues until the firms are left with only normal profits, where the price equals the average total cost of production. Therefore, choice E is the best answer as it explains how entry of new firms eliminate profits in the long run.

In the Long Run,monopolistically Competitive Firms Earn Zero Economic Profits