The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11-3
-Refer to Figure 11-3.If a decrease in industry demand led to an inward shift of each firmʹs demand curve,a 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 a decrease in industry demand led to an inward shift of each firmʹs demand curve,a typical firm would

Quizplus · Accepted Answer

If demand shifts inward for all firms in the industry, the demand curve for the typical firm will shift left. This will result in a lower quantity demanded and a lower price. If the new price is below the average total cost (ATC) curve, firms will earn losses in the short run. In the long run, some firms will exit the industry, as they cannot sustain losses forever, which will shift the remaining firms' demand curves to the right. Eventually, the remaining firms will earn zero economic profit at the point where the demand curve is tangent to the ATC curve. Therefore, a decrease in industry demand leads to losses for the typical firm in the short run and some firms will exit the industry in the long run.

The Diagram Below Shows Demand and Cost Curves for a Monopolistically