Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium,
A)the number of firms in the market decreases.
B)each existing firm experiences a decrease in demand for its product.
C)each existing firm experiences a rightward shift of its marginal revenue curve.
D)each existing firm experiences an upward shift in its average total cost curve.

Question

Quizplus · Accepted Answer

Positive profits in a monopolistically competitive market will attract new firms to enter and compete for market share. As the number of firms increases, the demand for each individual firm's product decreases, leading to a decrease in demand for the product of each existing firm. This will result in a decrease in profits and a movement towards long-run equilibrium where firms earn only normal profits. The marginal revenue curve for each existing firm will shift leftward, not rightward, as there is now more competition in the market. There is no reason to expect an upward shift in the average total cost curve.

Suppose That Monopolistically Competitive Firms in a Certain Market Are