Question

The force that leads to zero economic profits for monopolistically competitive firms in the long run...

The force that leads to zero economic profits for monopolistically competitive firms in the long run is
A.  excess capacity.
B.  price wars among firms.
C.  entry by new firms.
D.  excessive advertising.
Business   Economics   
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Answer #1

C

The difference between the short‐run and the long‐run in a monopolistically competitive market is that in the long‐run new firms can enter the market, which will lead to positive earnings for these firms atleast in the short run. Now these firms will be attracted to enter in the long run as well as the barriers are lesser. Also these firms will supply differnciated products in the market leading to firm's market demand curve to shift to the left. With more and more firms entering in to the market the demand curve of the firms will keep shifting left till the time the curve is tangent to the average total cost curve at the profit maximizing level of output. At this point economic profits for a firm is zero.

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