If there is a monopolistically competitive industry with firms enjoying above- normal profits, what will probably happen to costs as other firms enter the industry?

Monopolistic competition is a market structure where many firms sell products that are similar but not identical. In this market structure, firms have some control over pricing, as products are differentiated but still have some degree of substitutability. Therefore, each firm faces a downward-sloping demand curve for its own product.

Firms in a monopolistically competitive industry can earn above-normal profits in the short run when prices are high enough to cover the cost of production and allow for extra earnings. Above-normal profits are possible because firms have some power over the prices they can charge, due to product differentiation and brand loyalty from consumers.

When firms in a monopolistically competitive industry are earning above-normal profits, it creates an incentive for new firms to enter the market to capitalize on the lucrative opportunities. As new firms enter the industry, competition increases, and the market becomes more saturated.

When more firms enter the industry, the competition among firms intensifies, which can lead to several outcomes affecting costs: a) Greater demand for resources: An increase in the number of firms may lead to a higher demand for resources, such as labor or raw materials. This could result in higher costs for the industry as a whole due to increased competition for the same resources. b) Economies of scale: Some firms might be able to achieve economies of scale with increased production, leading to a reduction in average costs. However, this is not guaranteed in monopolistic competition, as the entry of new firms may also erode market shares, preventing a single firm from enjoying the full benefits of economies of scale. c) Increased competition and downward pressure on price: As the number of firms in the industry increases, competition among firms becomes more intense. As a result, firms will face downward pressure on prices, which may lead to lower revenues and a reduced ability to cover costs. This can especially affect smaller firms with higher average costs, causing their profitability to shrink. In conclusion, the entry of new firms in a monopolistically competitive industry where firms enjoy above-normal profits will likely lead to increased costs for the industry due to higher demand for resources and intensified competition. While economies of scale may help some firms lower their costs, the overall trend is usually a decrease in profitability as firms are forced to compete more aggressively to maintain their market share.