Chapter 67, Problem 7MCQ

To determine

The correct option that is responsible to eliminate profits in a monopolistically competitive industry in the long run.

Answer to Problem 7MCQ

From the available options, the correct option is the exit of firms.

Explanation of Solution

Companies in a monopolistic competition face the situation of zero economic profit in long run because of the freedom of entry and exit. It happens because any firm can leave the industry when it assumes there will be no profit in the future, which causes no profit for the industry.

There are no rising barriers to entry in a monopolistic industry and if new firms enter the market in long run, then it may be good for the industry as they can generate profits. There is no advertising cost in the industry because products are similar. Moreover, production costs do not cause profits in this market structure when the industry deals with long-run survival because there is no such competition in the market.

It means the correct option is e (the exit of firms) and all other options would be incorrect.

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple

manufacturers compete with one another yet sell distinct products that are not exact substitutes.