For an individual firm operating in a monopolistically competitive industry, the firm ______ earn short-run economic profits and ________ earn long-run economic profits.
A)can; can.
B)cannot; cannot
C)can; cannot
D)cannot; can

Question

Quizplus · Accepted Answer

In the short run, a firm operating in a monopolistically competitive industry can earn economic profits due to its ability to set prices above marginal cost. However, in the long run, other firms are likely to enter the market and offer similar products, causing the demand for the original firm's product to decrease, and driving down prices and profits. Therefore, a monopolistically competitive firm can earn short-run economic profits, but cannot earn long-run economic profits. In the short-run, a monopolistically competitive firm can earn economic profits by charging a price that is greater than its marginal cost. The firm can do so by creating a differentiated product that consumers are willing to pay a premium for. However, in the long-run, other firms will enter the market, attracted by the potential profits. This will increase competition, which will drive down the demand for the original firm's product and its price. As a result, the firm's economic profits will be eroded, and it will only be able to earn a normal rate of return. Therefore, the firm can earn short-run economic profits but cannot earn long-run economic profits. Choice C correctly captures this.

For an Individual Firm Operating in a Monopolistically Competitive Industry