19 A firm in a monopolistically competitive market that does not continue to innovate is likely to:
A. become more efficient
B. earn a normal profit
C. earn positive economic profits
D. see its demand curve become more inelastic

Question

19 A firm in a monopolistically competitive market that does not continue to innovate is likely to:
A.    become more efficient 
B.    earn a normal profit
C.    earn positive economic profits
D.    see its demand curve become more inelastic

BlackTom AI · Accepted Answer

To tackle this question, let's evaluate what a monopolistically competitive firm faces and how innovation affects profits in the long run.
Option A: 'become more efficient' — While firms in this market strive to differentiate and may improve efficiency, there is no automatic guarantee of becoming more efficient solely due to not innovating. In the long run, lack of innovation typically erodes profits rather than directly forcing efficiency gains, so this statement is not reliably true.
Option B: 'earn a normal profit' — In a monopolistically competitive market, free entry and exit erode economic profits to zero in the long run. If a firm stops innovating, demand for its product becomes less distinct compared to rivals, leading to competition and normal profits rather than positive economic profits. This aligns with the standard long-run outcome of zero economic profit (normal profit).
Option C: 'earn positive economic profits' — Positive economic profits rely on some advantage, often through product differentiation or innovation. Without ongoing innovation, entry from other firms will erode any excess profits, making sustained positive profits unlikely. Hence this option is incorrect in the typical long-run model.
Option D: 'see its demand curve become more inelastic' — In monopolistic competition, products are differentiated, and if a firm does not innovate, competitors offer substitutes that make the firm’s demand more elastic, not more inelastic. So this statement mischaracterizes the likely demand dynamics in this scenario.
Overall, the most consistent long-run outcome for a firm that ceases to innovate in a monopolistically competitive market is earning only normal profit, with economic profits driven to zero due to competition from close substitutes.

ECNM1116.36617.202230 Practice Quiz Monopolistic Competition

19 A firm in a monopolistically competitive market that does not continue to innovate is likely to: A. become more efficient B. earn a normal profit C. earn positive economic profits D. see its demand curve become more inelastic

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