Why don't some firms in monopolistic competition earn losses in the long run?

A) The firms have enough monopoly power to ensure they always earn profits.
B) Free entry allows enough firms to remain in the market and maintain the critical mass of firms required to attract customers.
C) Free exit implies that any unprofitable firms leave the market in the long run.
D) In the long run, firms will build enough brand loyalty among customers to ensure a profitable level of sales.

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Muskaan Singh · Accepted Answer

Final Answer : C, Explanation :  In monopolistic competition, firms can only earn profits in the short run due to the existence of product differentiation and some degree of market power. In the long run, free entry encourages new firms to enter the market, which leads to an increase in the number of firms and the level of competition. This increased competition leads to lower prices and lower profits for firms. Firms that cannot cover their costs will leave the industry in the long run, which ensures that only profitable firms remain. Therefore, free exit implies that unprofitable firms leave the market in the long run, which ensures that firms in monopolistic competition do not earn losses in the long run.

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