FIGURE 10.4 Monopolistic Competition, Entry, and Exit (a) At P0 and Q0, the monopolistically competitive firm in
this figure is making a positive economic profit. This is clear because if you follow the dotted line above Q0, you can
see that price is above average cost. Positive economic profits attract competing firms to the industry, driving the
original firm’s demand down to D1. At the new equilibrium quantity (P1, Q1), the original firm is earning zero
economic profits, and entry into the industry ceases. In (b) the opposite occurs. At P0 and Q0, the firm is losing
money. If you follow the dotted line above Q0, you can see that average cost is above price. Losses induce firms to
leave the industry. When they do, demand for the original firm rises to D1, where once again the firm is earning zero
economic profit.
244 10 • Monopolistic Competition and Oligopoly

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