In the long run, what will happen to a monopolistically competitive firm?

• A. It will become a monopoly and set prices without competition.
• B. It will earn zero economic profit due to the entry of new firms.
• C. It will continue to earn positive economic profit because of barriers to entry.
• D. It will be forced to shut down due to perfect competition.

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of monopolistic competition: many firms, differentiated products, and free entry and exit in the long run.
2. Recognize that in the short run, a monopolistically competitive firm can earn positive economic profits because it has some market power due to product differentiation.
3. Analyze the long-run adjustment process: positive economic profits attract new firms to enter the market, increasing competition and reducing demand faced by each existing firm.
4. Note that as new firms enter, the demand curve for each individual firm shifts leftward and becomes more elastic, reducing the firm's ability to set prices above average total cost.
5. Conclude that in the long run, entry continues until economic profits are zero, meaning the firm earns just enough to cover all costs, including opportunity costs, but does not become a pure monopoly.