CFA Level I · CFA Level I Exam · The Firm and Market Structures
A monopolistically competitive firm is earning positive economic profit in the short run. Over time, the most likely long-run result is that:
New firms enter the industry, shifting each existing firm's demand curve to the left until price equals average total cost and economic profit falls to zero. Low barriers to entry make this adjustment possible, unlike in a monopoly or oligopoly.
- Anew firms enter, shifting each firm's demand curve left until economic profit is zeroCorrect
- Bexisting firms raise prices to keep the economic profit
- Cnew firms are blocked, so economic profit persists
Explanation
Barriers to entry are low in monopolistic competition. Entry of new firms with close substitutes reduces the demand for each existing firm's product, shifting its demand curve left until price equals average total cost and economic profit is zero. The other options assume barriers to entry or ignore entry.
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