Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
New firms will enter the market, increasing supply and driving down prices.
B
The firm will reduce output to increase its prices.
C
The firm's demand curve will shift to the left due to decreased consumer interest.
D
The firm will continue making economic profits indefinitely.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, if a firm is making economic profits, it will attract new firms to enter the market in the long run. This happens because other businesses see the opportunity to earn profits and want to compete. As new firms enter, they will offer similar products, which will increase competition. As a result, the demand for the original firm's product will decrease, leading to lower prices and reduced profits. Eventually, the market will reach a point where firms earn normal profits, meaning they cover their costs but do not make extra economic profits.
Detailed Explanation
When a firm makes profits, it attracts new businesses. Other options are incorrect because Some might think a firm can just cut back on production to raise prices; It's a common mistake to think that less interest means demand will drop.
Key Concepts
Monopolistic Competition
Market Entry and Exit
Economic Profit
Topic
Graphing Monopolistic Competition
Difficulty
hard level question
Cognitive Level
understand
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