Question

Monopolistic competitors can make a _____________ in the short-run, but in the long run, ______________ will drive these firms toward _______________________.

A)

profit or loss; entry and exit; a zero-profit outcome

B)

loss; exit; losses on their earnings

C)

profit or loss; exit; economic profits

D)

profit; entry; a price that lies at the very bottom of the AC curve

Answer 1

Monopolistic competitors can make a __profit or loss___________ in the short-run, but in the long run, _entry and exit_____________ will drive these firms toward ___________a zero profit outcome____________.

In monopolistic competition there are many firms in the market which sell products which are different from one another in some way.

When a firm under monopolistic competition earns economic profits, other firms will be attracted to enter into the market. As new firms enter into the market, the demand and marginal revenue of an individual firm will decrease. The new firms will keep entering the market until the economic profit becomes zero.

The opposite of this happens when a firm is making a loss in the short run. In such a case some firms will exit the market. The demand of an individual firm will therefore increase and the losses will reduce. The firms will exit the maket until there are no more losses. At this point the economic profit becomes zero.

Therefore, the correct option is A.