Question

What happens in a market with free entry and exit under monopolistic competition?

Options

• New firms cannot enter even if there are profits

• Firms can enter when there are profits and leave when there are losses

• Only government-approved firms can enter

• Existing firms can never leave the market

Answer 1

Firms can enter when there are profits and leave when there are losses

Explanation:

Free entry and exit mean that profit opportunities attract new firms, and losses push firms to exit, helping to regulate the number of firms in the market.