Final answer:
In a monopolistically competitive market, the entry of new firms in response to economic profits earned by an incumbent firm leads to a decrease in demand for that firm's product and thus a lower profit-maximizing price and output, eventually resulting in zero economic profits in the long run. Correct option is A.
Step-by-step explanation:
When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost, it signals the possibility of economic profits. As a result, new firms are likely to enter the market, drawn by the opportunity to earn profits. This influx of competitors will increase the supply of the product, which tends to lower the price and decrease the demand for the incumbent firm's product.
Over time, as the market adjusts and reaches long-run equilibrium, the original firm's profit-maximizing price and output levels will decrease, eventually leading to zero economic profits as the firm's perceived demand curve touches the average cost curve.
The presence of economic profits in the short term is self-correcting as the market dynamics lead to increased competition and the erosion of those profits. What will happen to the original firm's profit-maximizing price and output levels is that they will decrease due to market entry of new firms until economic profits are eliminated.