Figure: Monopolistic Competition Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you would expect:
A) prices to increase.
B) demand to become more inelastic.
C) less quality and innovation.
D) more firms to enter the market.

Question

Figure: Monopolistic Competition  Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you would expect:
A) prices to increase. 
B) demand to become more inelastic. 
C) less quality and innovation. 
D) more firms to enter the market.

Quizplus · Accepted Answer

In the long run, firms in monopolistically competitive markets will experience only normal profits (zero economic profits), which is similar to the situation in perfect competition. This means that there are no barriers to entry, and new firms will be attracted to the market, leading to more competition. Therefore, we would expect more firms to enter the market in the long run. Prices will not necessarily increase and demand will not necessarily become more inelastic. Quality and innovation may either increase or decrease depending on the specific behavior of firms in the market.