What financial result does a monopolistically competitive firm achieve in the short run if prices exceed average total costs ?
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Answer: D. profits and firms enter the market
Explanation
Earning positive economic profits encourages new entrepreneurial firms to enter the monopolistically competitive industry. New market entrants increase product variety and draw customers away from existing profitable companies. This continuous entry process eventually drives economic profits down to zero in the long-run equilibrium. Monopolistic competition features many firms selling differentiated products with low barriers to entry and exit. Short-run profits occur when market demand allows firms to charge prices exceeding their average total costs. Free entry and exit are fundamental structural assumptions underlying standard monopolistic competition market models.
Retail markets like restaurants and clothing stores frequently experience short-run profit cycles driven by new entrants. Entrepreneurs constantly search for differentiated product niches to capture temporary short-run economic profits. Policymakers generally view easy market entry as beneficial for fostering innovation and consumer choice. Firms exit the market when they experience ongoing economic losses rather than when they earn profits. Firms do not enter markets when they are suffering financial losses; instead, struggling businesses leave the industry. Suffering losses leads directly to firm exits, whereas earning profits incentivizes new competitors to enter.
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Answer: B. making markets contestable
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