When a market is monopolistically competitive, the typical firm in the market can earn
A)losses in the short run and profits in the long run.
B)profits in the short run and the long run.
C)losses in the short run and zero profit in the long run.
D)zero profit in the short run and losses in the long run.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms have some degree of market power as they differentiate their products from their competitors. This differentiation allows them to charge a slightly higher price than their competitors. However, this also means that there are close substitutes available in the market. In the short run, firms can earn profits by pricing their products slightly above their costs. However, as other firms in the market also have some degree of market power, they can also increase their prices leading to intense competition, and eventually driving down profits. In the long run, firms will only be able to earn zero profit as the differentiation of the product will not provide any significant advantage, but they will still have to bear the costs of product differentiation. Therefore, in the short run, firms can earn losses due to intense competition, and in the long run, they can earn zero profit.

When a Market Is Monopolistically Competitive, the Typical Firm in the Market