In monopolistically competitive markets, free entry and exit suggests that:

• A. Firms can maintain long-run economic profits due to product differentiation.
• B. Firms will earn zero economic profit in the long run.
• C. Firms will always produce at the minimum point of their average cost curve.
• D. Barriers to entry prevent new firms from entering the market.

Answer: (B)

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 free entry and exit imply that if firms are earning positive economic profits, new firms will enter the market, increasing competition and driving profits down.
3. Recognize that in the long run, economic profits tend to zero because entry and exit continue until no firm can earn more than a normal profit.
4. Note that product differentiation allows firms to have some market power, so they do not produce at the minimum point of their average cost curve, unlike perfect competition.
5. Conclude that barriers to entry do not exist in monopolistic competition, so firms cannot maintain long-run economic profits due to free entry and exit.