Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the left due to a recession

Question

Quizplus · Accepted Answer

When the market demand curve shifts to the left due to a recession, the demand for individual firms' products also decreases, leading to a reduction in their revenue. In the short run, firms may not be able to adjust their output levels or their prices accordingly, which could result in losses or negative profits for some players in the market. However, in the long run, some firms may exit the market, causing the remaining firms to gain some market power and increase their prices to cover their costs, but this would likely take some time to occur. Option A is incorrect because the number of firms in the market remains the same, at least in the short run. Option C is also incorrect because firms' average costs would increase as they decrease output levels due to the loss of economies of scale, among other factors.

Suppose That a Monopolistically Competitive Market Is in Its Long-Run