The correct answer is: D. May earn normal profit, super normal profit or incur losses.
In the short run, a firm in monopolistic competition may earn normal profit, super normal profit or incur losses. This is because the firm faces a downward-sloping demand curve and has some control over its price. However, the firm’s demand curve is not as steep as a monopoly’s demand curve, so the firm has less market power. This means that the firm’s price will be higher and its output will be lower than a monopoly’s price and output.
If the firm’s costs are low enough, it may be able to earn super normal profit in the short run. However, if the firm’s costs are high, it may incur losses in the short run. If the firm incurs losses in the short run, it may exit the market in the long run.
Here is a brief explanation of each option:
- Option A: Always earns profits. This is not always the case. A firm in monopolistic competition may earn normal profit, super normal profit or incur losses in the short run.
- Option B: Incurs losses. This is also not always the case. A firm in monopolistic competition may earn normal profit, super normal profit or incur losses in the short run.
- Option C: Earns normal profit only. This is not always the case. A firm in monopolistic competition may earn normal profit, super normal profit or incur losses in the short run.
- Option D: May earn normal profit, super normal profit or incur losses. This is the correct answer. A firm in monopolistic competition may earn normal profit, super normal profit or incur losses in the short run.