Question

As in perfect Competition, the Firms operating in a monopolistically competitive industry can realize only Normal Profits in the long run because.

• A. The Firms tend to have diseconomies of scale in the long run.
• B. There are virtually no entry or exit barriers.
• C. Consumers are more price sensitive in the long ruin thar in the short run.
• D. Cartels agreements tend to be more unstable with the increase of time as member Firms try to increase their profits by cheating on the agreement.

Answer 1

The correct option is B There are virtually no entry or exit barriers.

Perfect competition is a type of market where there are huge number of buyers and sellers who deals in the same type of product due to which no individual unit is able to influence the price of the product.

Under perfect competition, there is freedom of entry and exit of firms. Therefore, when there is super-normal profits or losses the firms in the market enter and exit respectively due to which the firms in the industry only earn normal profits in the long run.

So in monopolistic competition, the industry earns only normal profits in the long run due to no barriers for entry and exit of the firms.