In Monopolistic Competition, When Firms Make an Economic Profit

question 91

Multiple Choice

In monopolistic competition, when firms make an economic profit

• A) the existing firms continue to make an economic profit in the long run because of product differentiation.
• B) new firms enter the industry so that the price falls and the economic profit eventually falls to zero.
• C) new firms enter the industry so that output decreases and the economic profit increases.
• D) new firms enter the industry so that output increases and the economic profit increases.

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Definitions:

Depreciation

A tax deduction reflecting the decrease in value of an asset over time due to wear and tear.

Section 1245

A tax code provision defining the treatment of gains from the sale of depreciable personal property, requiring that such gains be treated as ordinary income to the extent of depreciation taken.

Section 1231 Gain

The profit from the sale or exchange of real or depreciable property used in a business and held longer than one year.

Preferential Rates

Special, often lower, tax rates applied to certain types of income, such as capital gains or dividends, as an incentive or benefit.