A monopolistically competitive firm sells differentiated athletic shoes. In the short run, it sets and earns economic profit because at the chosen quantity. Based on the monopolistically competitive firm's situation, which feature explains why long-run economic profit is zero (after entry occurs)?
- Free entry shifts each firm's demand left until the demand curve is tangent to at the quantity where . (correct answer)
- High barriers to entry allow incumbents to keep earning positive economic profit indefinitely.
- Identical products force firms to take the market price, eliminating all market power in the long run.
- Firms collude to set a joint profit-maximizing output, driving economic profit to zero through coordination.
- In the long run, becomes tangent to , ensuring firms earn normal profit at the minimum of .
Explanation: This question examines the key feature of monopolistic competition that drives long-run profits to zero. Monopolistic competition is characterized by differentiated products (like athletic shoes with unique designs) and free entry/exit. When firms earn positive economic profit in the short run (P > ATC at the quantity where MR = MC), new firms enter the market with their own differentiated versions. This entry shifts each incumbent firm's demand curve leftward as market share is divided among more competitors. The crucial mechanism is that entry continues until each firm's demand curve becomes tangent to its ATC curve at the profit-maximizing output, ensuring P = ATC and zero economic profit. Unlike monopoly (with barriers) or perfect competition (with identical products), monopolistic competition combines product differentiation with free entry. The key strategy is to identify that free entry shifts demand left until the tangency condition (D tangent to ATC) eliminates profits.