A monopolistically competitive firm may earn abnormally high profits in the:

• A. short run, before new firms enter the market
• B. short run, only if the firm is a pure monopoly
• C. long run, after all firms have entered
• D. long run, when barriers to entry are high

Answer: (A)

Verified step by step guidance

1. Understand the characteristics of a monopolistically competitive market: many firms, differentiated products, and free entry and exit in the long run.
2. Recall that in the short run, firms can earn abnormal (economic) profits because there are not yet new firms entering the market to compete away those profits.
3. Recognize that in the long run, the entry of new firms attracted by short-run profits increases competition, which drives economic profits to zero.
4. Note that unlike a pure monopoly, monopolistically competitive firms face competition and do not have significant barriers to entry that sustain long-run abnormal profits.
5. Conclude that abnormal profits for a monopolistically competitive firm occur in the short run, before new firms enter the market and erode those profits.