Suppose that a monopolistically competitive firm decides to raise its price.The theory of monopolistic competition predicts that

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In monopolistic competition, firms have some market power as they offer differentiated products. However, there are close substitutes available in the market. Therefore, if a firm raises its price, some customers may switch to substitutes, but it is unlikely that all customers will leave. The demand facing the firm is relatively elastic, which means that the firm cannot raise the price beyond a certain point as it will lose too many customers. As a result, the firm may lose some of its customers, but it may still be able to increase its profits if the price increase leads to a larger increase in revenue than the decrease in quantity demanded. Therefore, choice A is the best answer. Choice B may be true in some cases, but it is not always guaranteed. Choice C is unlikely as it is rare for a firm to lose all of its customers. Choice D is incorrect because increasing the price can have an effect on profits. Choice E is also incorrect because the demand facing the firm is relatively elastic, which means that a price increase will lead to a relatively large decrease in quantity demanded.

Suppose That a Monopolistically Competitive Firm Decides to Raise Its