If firms in a monopolistically competitive industry experience short-run losses

Question

Quizplus · Accepted Answer

In the short-run, firms in a monopolistically competitive industry may experience losses due to high fixed costs and excess capacity. Some firms will choose to exit the industry, thereby reducing supply and shifting the demand curves of remaining firms to the right. This will eventually lead to firms earning a normal profit in the long-run. Therefore, option D is the best choice. Option A is incorrect because in a monopolistically competitive market, firms can enter or exit more easily than in a monopoly. Option B is incorrect because increasing prices further could lead to a decrease in demand and may not necessarily result in a normal profit. Option C is incorrect because increased advertising spending will increase costs and may not necessarily result in increased demand.

If Firms in a Monopolistically Competitive Industry Experience Short-Run Losses