Assume that Nike is a firm in monopolistic competition. If Nike is making an economic profit from its new cross-training shoe, over time the demand for these shoes
A) decreases as new firms enter the market.
B) does not change as new firms enter the market.
C) increases as new firms enter the market.
D) decreases as firms exit the market.
E) increases as firms exit the market.

Question

Quizplus · Accepted Answer

In monopolistic competition, when a firm is making an economic profit, it attracts new firms to enter the market. These new firms increase the variety of products available, which can reduce the demand for the original firm's product as consumers have more alternatives to choose from. Hence, the demand for Nike's new cross-training shoe would decrease as new firms enter the market.

Assume That Nike Is a Firm in Monopolistic Competition