A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until
A)the original firm is driven into bankruptcy.
B)the firm's demand curve is perfectly elastic.
C)the firm's demand curve is tangent to its average total cost curve.
D)the firm exits the market.

Question

Quizplus · Accepted Answer

As new firms enter the industry, the demand faced by each individual firm will decrease, making it more elastic. However, in the long-run equilibrium of a monopolistically competitive market, the demand curve for each firm will be tangent to its average total cost curve at the profit-maximizing level of output. This occurs because new firms will continue to enter the industry until firms are earning zero economic profits.

A Monopolistically Competitive Firm Earning Profits in the Short Run