In the short run, a monopolistically competitive firm produces at the optimal level of output and is earning positive economic profits.Which of the following describes how this firm will adjust in the long run?
A)The entry of new firms shifts the firm's demand and marginal revenue curves leftward, decreasing the firm's level of output and the price the firm can charge until price equals average total cost.
B)The entry of new firms shifts the firm's demand and marginal revenue curves leftward, decreasing the firm's level of output and increasing the price the firm can charge until price equals average total cost.
C)The entry of new firms shifts the firm's marginal cost and average cost curves downward, decreasing the firm's level of output and the price the firm can charge until price equals average total cost.
D)The exit of firms shifts the firm's demand and marginal revenue curves rightward, increasing the firm's level of output and the price the firm can charge until price equals average total cost.

Question

Quizplus · Accepted Answer

In the long run, monopolistically competitive markets see the entry of new firms, which increases competition and reduces the market share of existing firms. This shift in market structure reduces the demand and marginal revenue curves for existing firms, leading to a decrease in output and prices until the firm earns only normal profits (where price equals average total cost). Therefore, the correct choice is A.

In the Short Run, a Monopolistically Competitive Firm Produces at the Optimal