Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
New firms will enter the market, driving prices down until firms earn zero economic profit.
B
Existing firms will raise their prices to maximize profits.
C
All firms will exit the market, leading to higher prices.
D
Firms will decrease their production until marginal cost equals marginal revenue.
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, if firms are making economic profits, it attracts new firms to enter the market. This happens because the profits signal that there is a good opportunity to earn money. As new firms enter, they will offer similar products, which increases competition. Over time, this added competition will reduce the demand for the original firms' products, causing their prices and profits to fall. Eventually, the market will reach a point where firms make zero economic profits, meaning they cover their costs but do not earn extra money, similar to how a popular ice cream shop might see more competition and lower its prices as new shops open nearby.
Detailed Explanation
When firms make profits, new companies want to join the market. Other options are incorrect because Some might think raising prices will help profits; The idea that firms will leave the market is wrong here.
Key Concepts
Market adjustments
Monopolistic competition
Marginal cost
Topic
Long-Run Equilibrium Adjustments
Difficulty
hard level question
Cognitive Level
understand
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