Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market in the long run you would expect:
A) both demand and price to stay the same.
B) both demand and price to increase as unprofitable firms leave the industry.
C) demand to decrease and price to fall to the point that P = AC.
D) demand to shift left and decrease price to the point that P = MC.

Question

Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market in the long run you would expect:
A) both demand and price to stay the same. 
B) both demand and price to increase as unprofitable firms leave the industry. 
C) demand to decrease and price to fall to the point that P = AC. 
D) demand to shift left and decrease price to the point that P = MC.

Quizplus · Accepted Answer

In the long run, we would expect demand to decrease as new firms enter the market and offer similar products, leading to a decrease in market share for existing firms. This would lead to a decrease in price as firms try to maintain their market share. Eventually, the price will fall to the point where it equals the average cost (P=AC), indicating that firms are earning only normal profits. This is the long-run equilibrium for a monopolistically competitive market.

Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the Figure