For an individual firm operating in a monopolistically competitive industry, the firm ______ earn short-run economic profits and ________ earn long-run economic profits.

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BlackTom AI · Accepted Answer

Starting with the basic concept: in a monopolistically competitive industry, firms face downward-sloping demand due to product differentiation, and there are relatively easy entry and exit.
Option 1: "can; can." This claims firms can earn short-run profits and can also earn long-run profits. In the short run, if a firm has a favorable demand curve or cost structure, it may earn economic profits. However, the long-run reality is that free entry erodes those profits as new firms enter and drive down demand faced by each existing firm, pushing profits toward zero economic profit (normal profit). Therefore this option misstates the long-run outcome.
Option 2: "cannot; cannot" Suggests that firms neither earn short-run nor long-run profits. While long-run profits are typically zero due to entry, it is possible to earn positive profits in the short run before entry adjusts. Thus this option incorrectly denies short-run profits altogether.
Option 3: "can; cannot" This aligns with the standard teaching: short-run economic profits may be earned due to the downward-sloping demand and particular cost structures, but in the long run, entry eliminates these profits, resulting in zero economic profit. This option captures both parts correctly.
Option 4: "cannot; can" States that firms cannot earn short-run profits but can in the long run. This conflicts with the mechanism of entry and the potential for short-run deviations above zero profit; it misrepresents the possibility of temporary gains before entry.
In sum, the only option that reflects the typical short-run profit possibility and the long-run erosion of profits in monopolistic competition is the one that says firms can earn short-run profits but cannot earn long-run profits.

ECON_104B_001_25S Chapter 13 Practice Problems -- Multiple-Choice

For an individual firm operating in a monopolistically competitive industry, the firm earn short-run economic profits and __ earn long-run economic profits.

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