Final answer:
In a monopolistically competitive market, when firms exit, remaining firms' profits may initially increase due to less competition. However, this effect is temporary as new firms may enter the market, driving profits back down towards zero in the long-run equilibrium, making the long-term impact on profits indeterminable without additional context.
Step-by-step explanation:
When firms exit a monopolistically competitive market, the profits of the remaining firms initially increase. This is due to less competition for the remaining firms, which can potentially capitalize on the reduced number of substitutes available for consumers, subsequently allowing them to increase prices and output, thus improving profitability. However, this situation is temporary, as over time, new firms may enter the market if they perceive that there are still profits to be made, effectively driving profits back down towards zero in the long-run equilibrium. Additionally, other factors such as changes in consumer preferences, technology, and production costs can also influence the level of profits. Therefore, the correct answer to the question is: 4) Cannot be determined without additional context.
In the long-run equilibrium, however, given the characteristics of monopolistic competition where there are many firms selling differentiated products and there are few barriers to entry, profits will normalize towards zero. Positive economic profits in the short term attract new entrants or provoke existing firms to expand production, which increases the overall market supply, leading to a decrease in prices and the erosion of profits. Conversely, if firms are making losses, some will exit, which reduces supply, increases prices, and eventually, all firms' profits return to zero.