Monopolistically competitive firms earn zero profits on average because:

Question

Quizplus · Accepted Answer

Monopolistically competitive firms are able to differentiate their products, which creates some market power, but they also face competition from other firms. If a firm earns positive economic profits, other firms will notice and enter the market, reducing demand for the existing firms and lowering prices. This process continues until profits are driven down to zero on average. Therefore, C is the correct answer. A is incorrect because monopolistically competitive firms do not price at marginal cost, but rather at a markup over marginal cost. B is incorrect because new firms are able to enter the market in the long run. D is incorrect because monopolistically competitive firms do not price at marginal cost, as mentioned above.

Monopolistically Competitive Firms Earn Zero Profits on Average Because