When entry occurs in a monopolistically competitive industry, which of the following is most likely to happen in the long run?

• A. Product differentiation decreases as new firms enter with identical products.
• B. The market price increases as more firms compete for customers.
• C. Existing firms experience higher profits due to increased market demand.
• D. The demand faced by each existing firm decreases, reducing their economic profits to zero.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive market: many firms, product differentiation, and free entry and exit in the long run.
2. Recognize that when new firms enter the market, they offer products that are close substitutes, increasing competition.
3. Analyze how the entry of new firms affects the demand curve faced by each existing firm: the demand curve shifts to the left (decreases) because customers have more alternatives.
4. Recall that in the long run, free entry and exit drive economic profits to zero, meaning firms earn just enough to cover their opportunity costs.
5. Conclude that the decrease in demand for each existing firm reduces their economic profits to zero, which is the long-run equilibrium outcome in monopolistic competition.