Unlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic

profits will attract competition. When another competitor enters the market, the original firm’s perceived
demand curve shifts to the left, from D0 to D1, and the associated marginal revenue curve shifts from MR0 to
MR1. The new profit-maximizing output is Q1, because the intersection of the MR1 and MC now occurs at point
U. Moving vertically up from that quantity on the new demand curve, the optimal price is at P1.

As long as the firm is earning positive economic profits, new competitors will continue to enter the market,

reducing the original firm’s demand and marginal revenue curves. The long-run equilibrium is in the figure at

point Y, where the firm’s perceived demand curve touches the average cost curve. When price is equal to

average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive
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