Final answer:
A permanent increase in demand leads to B) increased economic profit in the short run and prompts new firms to enter the market in the long run, which eventually drives the profits back to a zero-profit equilibrium due to changes in market supply and price.
Step-by-step explanation:
A permanent increase in demand increases economic profit in the short run and some firms will enter the market in the long run. When firms in a monopolistically competitive market are earning economic profits in the short run.
We do not expect them to continue doing so in the long run because these profits signal new firms to enter the market. The influx of new competitors typically causes the market supply curve to shift to the right.
Resulting in a decrease in market price till it reaches the zero-profit level.In a perfectly competitive market, any short-run profits will eventually evaporate in the long run.
Existing firms will increase production to the new output level where P = MR = MC in response to a demand increase, but the subsequent entry of new firms due to these economic profits will push down prices again to the zero-profit level.
Short-run losses will similarly dissipate due to the process of exit. Firms facing losses will exit the market, which shifts the market supply curve to the left, causing prices to rise until the zero-profit level is reached again.