In the long run, economic theory predicts that a monopolistically competitive firm will:

• A. face a perfectly elastic demand curve
• B. produce at the minimum point of its average total cost curve
• C. earn positive economic profit because of product differentiation
• D. earn zero economic profit due to the entry of new firms

Answer: (D)

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 long run, free entry and exit of firms drive economic profits to zero because if firms earn positive profits, new firms enter, increasing competition and reducing demand for each existing firm.
3. Recognize that unlike perfect competition, a monopolistically competitive firm faces a downward-sloping demand curve due to product differentiation, so it does not produce at the minimum point of its average total cost (ATC) curve.
4. Note that the demand curve is not perfectly elastic in monopolistic competition; it is more elastic than a monopoly but still downward sloping.
5. Conclude that in the long run, the firm earns zero economic profit because the entry of new firms erodes any positive profits, leading to a situation where price equals average total cost but not necessarily at the minimum ATC.