Question

In the long run equilibrium, the economic profits earned by a monopolistically competitive firm will be zero.

true or false.

Answer 1

Ans. True

Monopolistic competitive firm can earn economic profit only in the short run as it sets the price where marginal revenue equals to marginal cost. This pricing policy leads to the fall in demand for its good in the long run and more firm enter the market and differentiate it's goods which will increase the cost. Demand will fall and cost will rise until price equals to the average cost curve where monopolistic competitive firms have two outcome:

1) at this level, the firm will have excess capacity of production

2) at this level, the firm will have zero economic profit or normal economic profit.