If monopolistically competitive firms have some control over their prices, why don’t they set price above average total cost so they will realize an economic profit in the long run?
What will be an ideal response?
Entry is relatively easy in monopolistic competition. If a representative firm is earning economic profits in the short run, this condition will not persist as new firms enter the industry with the expectation of earning economic profits. As new firms enter, the demand curve faced by the typical firm will fall and become more elastic which tends to cause the disappearance of economic profits.
Economic profits might persist in a few cases where product differentiation is very strong, or because some firm has some sort of permanent advantage such as location or especially effective advertising.
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