Read the following statements - Assertion (A) and Reasoning (R):
Assertion: In monopolistic competition, firms earn normal profits in long run.
Reasoning: Free entry and exit of firms is allowed in monopolistic competition.
Assertion: In monopolistic competition, firms earn normal profits in long run.
Reasoning: Free entry and exit of firms is allowed in monopolistic competition.
Answer & explanation
Correct answer: option 1
If the firms in the industry are receiving supernormal profit in the short run, this will attract new firms. As new firms enter, some customers shift from existing firms to these new firms. So existing firms find that their demand curve has shifted leftward, and the price that they receive falls. This causes profits to fall. The process continues till super-normal profits are wiped out, and firms are making only normal profits. Converse is also true.