Over the past 5 years, 50 new restaurants have opened and 30 have closed in the city of Zuni. Currently there are 110 restaurants operating in the city. Which of the following best represents the market structure, barriers to entry, and economic profits in the long run?

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Question restatement: Over the past 5 years, 50 new restaurants have opened and 30 have closed in the city of Zuni. Currently there are 110 restaurants operating in the city. Which of the following best represents the market structure, barriers to entry, and economic profits in the long run?

Option 1: Market Structure = MONOPOLISTIC COMPETITION; Barriers to Entry = HIGH; Long-Run Economic Profits = ZERO
- Monopolistic competition is characterized by many firms, product differentiation, and relatively low barriers to entry. The scenario shows a net increase in total firms over time (50 in, 30 out), which suggests low to moderate entry barriers rather than high barriers. If barriers were HIGH, it would be difficult for new firms to enter and for the number of firms to rise as much as it has. Long-run profits in monopolistic competition are typically driven to zero due to free entry of new firms; however, the stated HIGH barriers conflict with the observed entry and exit dynamics. Overall, this combination is inconsistent with the typical low-barrier, many-firm market and is thus questionable.

Option 2: Market Structure = MONOPOLISTIC COMPETITION; Barriers to Entry = LOW; Long-Run Economic Profits = ZERO
- Monopolistic competition fits a market with many rival firms, product differentiation, and relatively easy entry and exit. The data showing 50 openings and 30 closings over five years suggests that firms can enter and exit with limited impediments, aligning with LOW barriers to entry. In the long run, firms in monopolistic competition earn zero economic profits due to the free entry, which drives prices down to the minimum average cost where profits vanish. This option aligns well with the observed turnover and standard theory about profits in the long run for this structure.

Option 3: Market Structure = PERFECT COMPETITION; Barriers to Entry = LOW; Long-Run Economic Profits = NEGATIVE
- Perfect competition would entail a very large number of firms producing homogeneous products with no ability to differentiate. While low barriers to entry match the idea of many entrants, the premise of the market being perfectly competitive would imply identical products, which is less consistent with a restaurant market where product differentiation (menu, ambiance, branding) is common. Moreover, long-run profits are typically zero in both perfect competition and monopolistic competition, not negative; negative profits would indicate firms are unable to cover costs, which is not suggested by the information given.

Option 4: Market Structure = MONOPOLISTIC COMPETITION; Barriers to Entry = HIGH; Long-Run Economic Profits = POSITIVE
- This combines monopolistic competition with high barriers to entry, which is illogical. If barriers to entry are high, new firms would struggle to enter, slowing growth in the number of restaurants and making it unlikely for long-run profits to remain positive in a market that typically erodes profits through entry. In monopolistic competition, long-run profits are driven toward zero due to free entry, not positive profits maintained with high barriers.

Option 5: Market Structure = PERFECT COMPETITION; Barriers to Entry = HIGH; Long-Run Economic Profits = POSITIVE
- This configuration is inconsistent on multiple fronts. Perfect competition implies no barriers to entry and homogeneous products, not high barriers. Positive long-run profits are not expected in the long run under perfect competition because free entry erodes profits to zero. The combination here contradicts both the barrier level and the profit outcome typically associated with perfect competition.

Summary of reasoning across options: The observed net change in the number of restaurants (more openings than closings) points toward relatively low barriers to entry, allowing new firms to enter as opportunities arise. The restaurant market tends to feature product differentiation (menuss, themes, locations), which aligns with monopolistic competition rather than perfect competition. In the long run, the presence of free entry in monopolistic competition drives economic profits toward zero, since new entrants erode supernormal profits. Options that propose HIGH barriers to entry conflict with the observed turnover, and options that propose PERFECT COMPETITION conflict with the typical level of product differentiation in restaurants. Therefore, the option that best matches monopolistic competition with LOW barriers to entry and ZERO long-run economic profits is the one that aligns with these theoretical expectations and with the observed firm turnover data.

AP Economics-Hillebrand AP Microeconomics Sem 1 Exam 2025 - Requires Respondus LockDown Browser

Over the past 5 years, 50 new restaurants have opened and 30 have closed in the city of Zuni. Currently there are 110 restaurants operating in the city. Which of the following best represents the market structure, barriers to entry, and economic profits in the long run?

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