In the long run, a monopolistically competitive firm will operate:
A) at the level of output that allows the firm to earn zero economic profit.
B) at the level of output that allows the firm to earn economic profit.
C) at the level of output that allows the firm to earn negative economic profit.
D) at any level of output.

Question

Quizplus · Accepted Answer

In the long run, monopolistically competitive firms will continue to enter the market until economic profits are driven to zero. This means that firms will operate at the level of output where marginal revenue equals marginal cost, which allows them to cover their average total costs and earn zero economic profit. If firms were earning economic profit, new firms would be incentivized to enter the market, increasing competition and driving profits down. Conversely, if firms were earning negative economic profits, some firms may exit the market, reducing competition and increasing profits until zero economic profit is once again reached.

In the Long Run, a Monopolistically Competitive Firm Will Operate