In the long run, profits in a monopolistically competitive market are zero because:
A) of government regulations.
B) of collusion.
C) firms are free to enter and exit the market.
D) firms produce a differentiated product.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms are free to enter and exit the market, which means that new firms can enter to take advantage of the profits being made by existing firms. As more firms enter, competition increases, and the demand for each firm's product decreases. This puts downward pressure on prices and eventually leads to zero economic profit in the long run. Government regulations or collusion can affect profits in the short run, but they do not play a significant role in determining long-run profits in a monopolistically competitive market. The fact that firms produce a differentiated product is what differentiates monopolistic competition from perfect competition, but it does not affect the long-run profit outcome.

In the Long Run, Profits in a Monopolistically Competitive Market