Question content area

Part $1$

A student$$ remarks:

$"$If firms in a monopolistically competitive industry are earning economic$$ profits, new firms will enter the industry.$$ Eventually, the representative firm will find its demand curve has shifted to the$$ left, until it is just tangent to its average cost curve and it is earning zero profit. Because firms are earning zero profit at that$$ point, some firms will leave the$$ industry, and the representative firm will find its demand curve will shift to the right. In$$ long$-$run equilibrium, price will be above average total cost by just enough so that each firm is just breaking$$ even."

Is the analysis correct or$$ incorrect?

Part $2$

A$.$

The analysis is incorrect. Firms in a monopolistically competitive industry cannot enter and exit as easily as the analysis supposes.

B$.$

The analysis is incorrect. In the$$ long$-$run equilibrium, price will be below average total cost by just enough so that each firm is just breaking even.

C$.$

The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the$$ firm's demand curve is tangent to its average cost curve it is still earning zero economic profit.

D$.$

The analysis is correct.