Question

A firm in a monopolistically competitive market makes no economic profit in the long run because

a. long-run price will be equal to long run average cost.

b. long-run price will be equal to long run marginal cost.

c. long-run marginal cost will be equal to long run marginal revenue.

d. long-run marginal cost will be too high to make any economic profit.

Answer 1

Answer: a. long-run price will be equal to long run average cost.

A firm in a monopolistically competitive market makes no economic profit in the long run because long-run price will be equal to long run average cost.

In the short-run, the economic profit earned by monopolistically competitive firms attracts other firms to enter the industry with their respective products. In a monopolistically competitive market, the firms produce differentiated product. The entry of new firms with diversified products in the industry increases competition and the availability of substitutes. As a result, over the long-run, the demand curve of each competitive firm for its product in the market shifts leftward. The leftward shift of the demand curve decreases the price of the product. The shift of the demand curve continues until it becomes tangent to the average cost curve of the firm.So in the long-run, a monopolistically competitive firm produces the output level for which the price of its product equals the average cost of production.Thus the firm earns a normal or zero or no economic profit in the long-run.

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