Which of the following statement(s) is/are TRUE?
I. Because monopolistically competitive firms sell differentiated products, their demand curves are downward sloping.
II. Monopolistically competitive firms earn above-normal profits because of high entry barriers.
III. As firms enter a monopolistically competitive industry, the demand curves of the existing firms shift down and to the left.
A) I and III only
B) I and II only
C) II only
D) III only

Question

Quizplus · Accepted Answer

Statement I is true because monopolistically competitive firms sell differentiated products, which means their products are not perfect substitutes and therefore they have some degree of market power, giving them a downward sloping demand curve. 
Statement III is also true because as more firms enter the industry, they offer more substitutes for consumers to choose from, reducing the market power of existing firms and shifting their demand curves down and to the left. 
Statement II is false because monopolistically competitive firms do not have high entry barriers, as there are usually few barriers to entry in these markets due to low economies of scale and no significant patents or regulations. Therefore, there is increased competition and firms tend to earn only normal profits in the long run.

Which of the Following Statement(s) Is/are TRUE