The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11-3
-Refer to Figure 11-3.If an increase in industry demand led to an outward shift in each firmʹs demand curve,and no change to the firmʹs costs,the typical firm would

Question

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11-3
-Refer to Figure 11-3.If an increase in industry demand led to an outward shift in each firmʹs demand curve,and no change to the firmʹs costs,the typical firm would

Quizplus · Accepted Answer

An increase in industry demand leads to an outward shift in each firm's demand curve, which means the firm can now charge a higher price for the same level of output. Since the firm is a monopolistically competitive firm, it has some degree of market power and can charge a price higher than its marginal cost in the short run. Therefore, the typical firm would be making profits in the short run. In the long run, new firms would enter the industry attracted by the profits, which would result in a decrease in the demand for each firm's product and a downward shift in each firm's demand curve. The entry of new firms would continue until each firm is earning only a normal profit or zero economic profit, and therefore, the typical firm would be making zero profits in the long run.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically