The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-If all firms in a monopolistically competitive market are incurring losses, then eventually:
A)the demand for the products in the market will increase.
B)the supply of the products in the market will increase.
C)the price of the products in general will decline.
D)the cost of production will increase.
E)the firms will exit until the existing ones just break even.

Question

The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
  MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-If all firms in a monopolistically competitive market are incurring losses, then eventually:
A)the demand for the products in the market will increase. 
B)the supply of the products in the market will increase. 
C)the price of the products in general will decline. 
D)the cost of production will increase. 
E)the firms will exit until the existing ones just break even.

Quizplus · Accepted Answer

In monopolistically competitive markets, firms can enter and exit with relative ease. If all firms in the market are incurring losses, some firms will choose to exit the market. This will decrease the supply of the products in the market and increase the market price. As the market price increases, some of the remaining firms may start to earn profits, which could attract new firms to enter the market. Eventually, the market will reach a point where the existing firms are just breaking even. Therefore, the best choice is E, firms will exit until the existing ones just break even.

The Figure Given Below Shows the Revenue and Cost Curves