If a typical monopolistically competitive firm is incurring short-run losses, then
A)other more competitive firms will enter the market.
B)as some firms leave, the remaining firms will experience an increase in the demand for their products.
C)as some firms leave, the demand for the products of the remaining firms will become more elastic.
D)the industry will eventually cease to exist.

Question

Quizplus · Accepted Answer

In the short run, firms in monopolistic competition may incur losses due to high fixed costs and low demand. As some firms exit the market due to these losses, the remaining firms will experience an increase in the demand for their products, which can lead to an increase in price and profits in the long run. Therefore, choice B is the best answer. Choice A is not applicable as more competitive firms entering the market would make the competition even tougher for existing firms. Choice C is not correct as the demand for products in a monopolistically competitive market is already relatively elastic due to the availability of close substitutes. Choice D is too extreme and not applicable in most cases.

If a Typical Monopolistically Competitive Firm Is Incurring Short-Run Losses