Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. If the ATC=40 at the profit-maximizing level of output, which of the following will occur in the long run in this industry?
A)Firms will exit this industry.
B)Firms will enter this industry.
C)This firm will continue to earn positive economic profits.
D)This firm will incur losses.

Question

Figure 16-2. The figure is drawn for a monopolistically competitive firm.

-Refer to Figure 16-2. If the ATC=40 at the profit-maximizing level of output, which of the following will occur in the long run in this industry?
A)Firms will exit this industry. 
B)Firms will enter this industry. 
C)This firm will continue to earn positive economic profits. 
D)This firm will incur losses.

Quizplus · Accepted Answer

If the ATC=40 at the profit-maximizing level of output, this means that the firm is earning zero economic profits in the long run. In a monopolistically competitive market, there are no barriers to entry or exit, so if firms are earning zero profits, some firms will exit the market in the long run until remaining firms are able to earn positive economic profits. Therefore, option A is the best choice.