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In the long run, a firm under monopolistic competition earns only normal profit. This happens because:
AFree entry of new firms shares demand until supernormal profit disappears
BStrong barriers prevent any new firm from ever entering the market
CThe firm produces exactly at the minimum point of its average cost
DEach firm faces a perfectly elastic demand curve like a price taker
Answer & Solution
Correct answer: A. Free entry of new firms shares demand until supernormal profit disappears
1. Short-run supernormal profit signals an opportunity to new firms.
2. Entry is easy because barriers are low under monopolistic competition.
3. New entrants split the total demand, so each firm's demand and profit fall.
4. Entry stops only when AR equals AC and just normal profit remains.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.22_
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