32. Firm X is a typical firm in a market characterized by the model of monopolistic competition. Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for services. We can assume that in the long run, the economic profits of typical firms in the industry will be:
A) typical of those earned by monopoly firms.
B) positive but less than the level typically earned by monopoly firms.
C) zero.
D) negative.
To answer this question, we need to understand the concept of monopolistic competition and its impact on long-run equilibrium.
Monopolistic competition is a market structure where many firms compete by offering differentiated products, meaning that they are not perfect substitutes for each other. Examples include restaurants, clothing stores, and hair salons. In such a market, firms have some control over their prices and face downward sloping demand curves.
In the long run, firms in monopolistic competition can enter or exit the market, adjusting their production levels and prices. The goal is to maximize profits, but in the long run, economic forces will drive firms towards a state of equilibrium.
Now, let's consider the scenario described in the question: an increase in demand for services in a long-run equilibrium. In this case, firms in the industry will experience an increase in their demand. As a result, firms will be able to charge higher prices and earn higher profits in the short run.
However, in the long run, other firms will notice these attractive profits and enter the market. This increased competition will lead to a decrease in demand for each individual firm, as consumers have more options to choose from. This decrease in demand will eventually drive down prices and reduce profits. Firms will continue to enter the market until economic profits reach zero.
Therefore, the correct answer to the question is C) zero. In the long run, economic profits of typical firms in a market characterized by monopolistic competition will be zero. This is because entry and exit of firms ensure that no firm has a sustained competitive advantage, and price competition erodes potential profits.