Suppose in the city of Blacksburg, music stores operate in a monopolistically competitive market. If the price of CDs in Blacksburg is currently equal to $20 per CD and the average cost of CDs is $15, in the long run we expect the price of CDs to

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In a monopolistically competitive market, firms have some market power to set their prices, but entry of new firms limits this power in the long run. If the price of CDs is currently above the average cost, this suggests that firms are earning profits. This will attract new firms to the market, increasing competition and reducing the market power of existing firms. In the long run, we expect the price of CDs to decrease, as firms must lower their prices to compete with new entrants. However, since the average cost of selling CDs is $15 and the price is currently $20, we expect firms to still earn economic profits in the short run. As the market becomes more competitive, the average cost of selling CDs may increase due to increased advertising and other efforts to differentiate products in order to maintain market share. Therefore, in the long run, we expect the price of CDs to decrease and the average cost of selling CDs to increase.

Suppose in the City of Blacksburg, Music Stores Operate in a Monopolistically