Why do monopolistic competition and perfect competition yield similar long-run equilibrium results?
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Answer: B. firms will only earn a normal profit
Explanation
Free entry and exit eliminate economic profits in both market structures over time. New firms enter profitable markets, driving down prices until profits reach zero normal levels. Long-run equilibrium in both industries results in firms earning only a normal return. Economic profit accounts for both explicit costs and implicit opportunity costs. Perfect competition features identical products and numerous price-taking firms. Monopolistic competition involves differentiated products and many competing sellers.
Competitive markets protect consumer welfare by preventing sustained monopoly profits. Business managers monitor market entry barriers when evaluating long-term investment strategies. Economic theory uses these models to analyze industry efficiency and pricing behavior. Efficient output levels are only achieved in perfect competition, not monopolistic competition. Firms in monopolistic competition do not achieve full economies of scale due to excess capacity. Minimum average cost production occurs in perfect competition rather than monopolistic markets.
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