Economic profit under monopolistic competition

Firms operating in monopolistic markets produce which type of profits?

  1. Positive economic profits
  2. Negative economic profits
  3. No economic profits

Answer: 1

In a monopolistic industry, positive economic profits are possible and are a function of the price consumers are willing to pay minus the monopoly’s average cost (AC) curve

I think the correct answer supposed to be 3 becuase as new frims enter, the profits will be eroded resulting in no economic profit. Can anyone elaborate further why 1 according to the author is correct.

The question as you wrote it refers to monopoly, not monopolistic competition.

In monopolistic competition, the firms produce similar but not perfectly substitutable products. They are not price takers, and of course they do not compete via prices, they compete via marketing and differentiation. Some companies can differentiate enough from others to the extent to earn positive economic profits, this because they can charge higher prices to consumers above marginal costs. If you choose answer 3 you are talking directly about Perfect Competition, so cannot be.

As S2000 says, that question’s answer is talking about monopoly then… wrong. However, the question itself is clear enough.