Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms will earn economic profits
B
Firms will incur losses
C
Firms will break even
D
New firms will enter the market until profits are zero
Understanding the Answer
Let's break down why this is correct
Answer
In a monopolistically competitive market, there are many firms selling similar but not identical products, and there are no barriers to entry. This means that if a firm is making good profits, new firms can easily enter the market. As new firms join, they increase the competition, which leads to a decrease in the profits of existing firms. In the long run, this process continues until firms are only making normal profits, which means they are covering their costs but not earning extra profits. For example, if a new coffee shop opens and attracts customers away from an existing shop, the existing shop might have to lower its prices or improve its offerings to keep its customers.
Detailed Explanation
When firms make profits, new companies want to join the market. Other options are incorrect because Some might think firms keep making profits forever; It's a common mistake to think firms will lose money.
Key Concepts
long-run equilibrium
barriers to entry
Topic
Monopolistic Competition Analysis
Difficulty
medium level question
Cognitive Level
understand
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