Question

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic

competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?

Short answer

Original firms will earn zero economic profits in the long run.

Step-by-step solution

Step 1. Explanation

Other companies will respond in ways that take away the profits of the initial firm as long as the original firm is making positive economic gains. This will manifest as a decrease in demand for the original firm's product, a decrease in the firm's profit-maximizing price, and a decrease in the firm's profit-maximizing output level, effectively unwinding the process of increasing demand and a further increase in prices by the monopolistically competitive firm as a result of the successful advertising campaign.

Step 2. Final answer

The original firm, which generates higher profits due to a successful advertising campaign, will earn zero economic profits in the long run equilibrium.