The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Assume that the firm in Figure 12.4 is monopolistically competitive. In the long-run, we would expect:
A)the price of the firm's output to increase.
B)new firms to enter into the market.
C)few firms to leave the market.
D)the firm's demand curve to shift outward.
E)the firm's demand curve to become less elastic.

Question

The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
  MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Assume that the firm in Figure 12.4 is monopolistically competitive. In the long-run, we would expect:
A)the price of the firm's output to increase. 
B)new firms to enter into the market. 
C)few firms to leave the market. 
D)the firm's demand curve to shift outward. 
E)the firm's demand curve to become less elastic.

Quizplus · Accepted Answer

In the long-run, we would expect new firms to enter into the market in monopolistically competitive industries. This is because, in the long-run, economic profits are driven to zero due to entry, as seen by the point where the ATC curve intersects the demand curve. New firms entering the market would increase competition and potentially lower prices. The other options are not necessarily true in the long-run for a monopolistically competitive firm. The price of the firm's output may stay the same or decrease, few firms may leave the market, the demand curve may shift in either direction, and the elasticity of demand may stay the same or change.

The Figure Given Below Shows the Revenue and Cost Curves