Question

The model of monopolistic competition characterizes the market for plumbing services in a city. This market is initially in long-run equilibrium, but then there is an increase in the market demand for plumbing services. In the long run, the economic profits of typical firms in the industry will be:

Answer 1

Answer:

There will zero economic profits in the long run.

Explanation:

Monopolistic competition is a market structure where there is a large number of firms producing differentiated products. There is very low or no restriction on the entry and exit of firms in the market.  

The market for plumbing services in a city is a monopolistic competition. An increase in the market demand will cause the price to increase. This will cause an increase in the profits of the existing firms.  

In the long run, new firms will enter the market, increasing the market supply. This will cause the price level to decrease till all the firms are having zero economic profits.