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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

In the long run, a typical firm in monopolistic competition earns only normal profit. What mainly brings this outcome?

Free entry eliminates abnormal profit in the long run. New firms offering close substitutes take away part of each existing firm's sales, shifting its demand curve leftward until price equals average cost. At that point the firm earns only normal profit and has no incentive for further entry.

  1. AGovernment price control on branded goods
  2. BEntry of new firms that shifts each existing firm's demand curve leftward until price equals average costCorrect
  3. CCollusion among existing firms to restrict output
  4. DExit of firms that shifts the demand curve of the remaining firms rightward until losses are removed

Explanation

Abnormal profits attract new rivals with similar products. This reduces each firm's share of the market, shifting its demand curve to the left until price just equals average cost, so only normal profit remains. Option D describes the adjustment to losses, not to profits.

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