In the long run, is zero economic profit inevitable for a monopolistically competitive firm? Why or why not?

• A. Yes, because firms in monopolistic competition are price takers.
• B. No, because monopolistically competitive firms can always maintain positive economic profit due to product differentiation.
• C. Yes, because free entry and exit drive economic profit to zero in the long run.
• D. No, because government regulation prevents profits from falling to zero.

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: many firms, product differentiation, and free entry and exit in the long run.
2. Recall that in the short run, firms in monopolistic competition can earn positive economic profits due to product differentiation and some market power.
3. Analyze the effect of free entry and exit: if firms are earning positive economic profits, new firms will enter the market, increasing competition and reducing demand faced by each existing firm.
4. Recognize that this entry continues until economic profits are driven to zero, where firms earn just enough to cover their opportunity costs, but no more.
5. Conclude that in the long run, zero economic profit is inevitable for monopolistically competitive firms because free entry and exit eliminate any persistent economic profit, despite product differentiation.