When firms in monopolistic competition incur an economic loss,

Question

Quizplus · Accepted Answer

In monopolistic competition, firms have some degree of control over the price of their product, but they face competition from other firms that produce similar products. If a firm incurs an economic loss, it means that their total cost is greater than their total revenue. In this situation, firms may exit the industry, as they cannot sustain their losses, leading to a decrease in the number of firms in the industry. This decrease in supply would result in an increase in demand for the products of the firms that remain, as their products become relatively more valuable due to the decrease in competition. Therefore, the correct answer is (B) firms exit the industry, and demand increases for the products of the firms that remain.

When Firms in Monopolistic Competition Incur an Economic Loss