A monopolistically competitive firm sells differentiated streaming workout subscriptions. In the short run, it produces where and earns economic profit because . Based on the monopolistically competitive firm's situation, which feature explains why long-run profit is zero?
- Long-run profit is zero because firms merge into a single seller and behave like a monopoly.
- Long-run profit is zero because is tangent to the demand curve at the equilibrium quantity.
- Long-run profit is zero because products become identical and each firm faces perfectly elastic demand.
- Long-run profit is zero because entry shifts demand left until the firm earns normal profit where is tangent to . (correct answer)
- Long-run profit is zero because legal barriers to entry prevent new firms from competing away profit.
Explanation: This question tests identification of the key mechanism eliminating profits in monopolistic competition. Monopolistic competition involves firms selling differentiated products (like streaming workout subscriptions with unique content) with free entry and exit. When a firm earns economic profit in the short run (P > ATC at MR = MC), the lack of entry barriers allows new firms to enter with competing differentiated workout programs. Each new entrant shifts existing firms' demand curves leftward as subscribers spread across more options. The crucial insight is that entry continues until each firm earns only normal profit, which occurs when the demand curve is tangent to the ATC curve at the profit-maximizing quantity. This differs from monopoly (where legal barriers would block entry) and perfect competition (where products are identical). To solve these problems, focus on how free entry shifts demand left until the tangency condition ensures zero economic profit.