Why firms under monopolistic competition can earn only normal profit in the long run
Answers
In the long-run, the demand curve of a firm in a monopolistic competitive market will shift so that it is tangent to the firm's average total cost curve. As a result, this will make it impossible for the firm to make economic profit; it will only be able to break even. Each firm thus produces at a cost higher than the minimum and gets only normal profit.Under perfect competition, long run equilibrium is achieved at that point where MC = MR = AR = AC. Because of the perfectly elastic AR curve, a tangency occurs between AR and AC at the latter's lowest point.
Setting a Price and Determining Profit While a monopolistic competitive firm can make a profit in the short-run, the effect of its monopoly-like pricing will cause a decrease in demand in the long-run. Second, the firm will only be able to break even in the long-run; it will not be able to earn an economic profit.