Refer to Figure 26.4 for a monopolistically competitive firm. In the long run this firm is most likely to face A) Demand₁ and MR₁. B) Demand₁ and MR₂. C) Demand₂ and MR₂. D) A demand curve between Demand₁ and Demand ₂.

Question

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In the long run, monopolistically competitive firm will have an equilibrium where MC=MR and price exceeds marginal cost. The demand curve that a firm faces will shift leftward due to entry of new firms which offer close substitutes. The firm will experience a decrease in market share and the price of its product will fall. The demand curve will approach more elastic (horizontal) in the long run, making the firm's marginal revenue curve more elastic (flatter). This means that the MRS will approach the ratio of the price of the product to the marginal cost of production which will be more elastic as compared to short run where it is steeper (less elastic). Therefore, the firm is most likely to face a demand curve between Demand₂ and MR₂ in the long run.