Refer to the above graph.It represents a monopolistically competitive firm in a constant-cost industry.In long-run equilibrium this firm will:
A) continue to earn economic profits because it has monopolistic power to set its price.
B) become a perfectly competitive firm because there are no significant barriers to entry.
C) break even because average total cost (AT
C)and marginal cost (M
C)will increase as more firms enter the market.
D) break even because its demand curve will fall and become more elastic as it loses sales to other firms entering the market.

Question

Refer to the above graph.It represents a monopolistically competitive firm in a constant-cost industry.In long-run equilibrium this firm will:
A) continue to earn economic profits because it has monopolistic power to set its price. 
B) become a perfectly competitive firm because there are no significant barriers to entry. 
C) break even because average total cost (AT
C)and marginal cost (M
C)will increase as more firms enter the market. 
D) break even because its demand curve will fall and become more elastic as it loses sales to other firms entering the market.

Quizplus · Accepted Answer

In long-run equilibrium, new firms will enter the market due to the economic profits being earned by the monopolistically competitive firm. This will increase competition, causing the demand curve for the firm to fall and become more elastic. As a result, the firm will no longer have the ability to set its price above marginal cost and will have to lower its price to remain competitive. This will lead to a decrease in its economic profits and eventually, the firm will break even in the long run. Therefore, the best choice is D.

Refer to the Above Graph