The correct answer is D. May earn normal profit, super normal profit or incur losses.
In monopolistic competition, firms are able to set their own prices, but they face a large number of close substitutes. This means that they have some market power, but not as much as a monopoly. As a result, they can earn a profit in the long run, but it will not be as high as a monopoly’s profit.
The amount of profit that a monopolistically competitive firm earns will depend on the demand for its product and the costs of production. If the demand for its product is high and the costs of production are low, then the firm will be able to earn a supernormal profit. However, if the demand for its product is low or the costs of production are high, then the firm may only be able to earn a normal profit or even incur a loss.
Here is a brief explanation of each option:
- Option A: Earn supernormal profits. This is not always the case in monopolistic competition. Firms in monopolistic competition face a large number of close substitutes, which means that they have some market power, but not as much as a monopoly. As a result, they can earn a profit in the long run, but it will not be as high as a monopoly’s profit.
- Option B: Earn normal profits. This is the most likely outcome for firms in monopolistic competition. In the long run, firms will enter or exit the market until profits are driven down to normal levels.
- Option C: Incur losses. This is possible, but it is not the most likely outcome. Firms in monopolistic competition will only incur losses if the demand for their product is low or the costs of production are high.
- Option D: May earn normal profit, super normal profit or incur losses. This is the most accurate option. Firms in monopolistic competition can earn a profit, a loss, or normal profits in the long run.