Which of the following describes the long-run situation for a firm in a monopolistically competitive market?
A) Competition drives out firms until there is only one left.
B) New firms enter the market because of monopoly profits, the firm's demand curve shifts to the left and becomes flatter, and monopoly profits disappear.
C) New firms enter the market and eventually there is only one kind of product, and each firm agrees to share the profits.
D) Consumers are left with no choices and no close substitutes, and firms make higher profits.

Question

Quizplus · Accepted Answer

In the long-run, new firms will continue to enter a monopolistically competitive market because of the existence of monopoly profits. As more firms enter, the demand for each individual firm's product decreases, causing the demand curve to shift to the left and become more elastic. This leads to a decrease in profits for each firm, eventually eliminating the monopolistic element of the market and resulting in zero economic profits for all firms. Therefore, the best description of the long-run situation for a firm in a monopolistically competitive market is B.

Which of the Following Describes the Long-Run Situation for a Firm