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Figure: Monopolistic Competition
-(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market, in the long run you would expect:
A) both demand and price to stay the same.
B) both demand and price to increase as unprofitable firms leave the industry.
C) demand to decrease and price to fall to the point that P = AC.
D) demand to shift left and decrease price to the point that P = MC.

Question

Use the following to answer questions:
Figure: Monopolistic Competition 
-(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market, in the long run you would expect:
A) both demand and price to stay the same. 
B) both demand and price to increase as unprofitable firms leave the industry. 
C) demand to decrease and price to fall to the point that P = AC. 
D) demand to shift left and decrease price to the point that P = MC.

Quizplus · Accepted Answer

In monopolistic competition, firms can earn positive economic profits in the short run, but in the long run, new firms are attracted to the market due to the profit potential. As a result, demand for each firm's product decreases, causing the firm's marginal revenue curve to shift left. This leads to a decrease in price and a decrease in the firm's economic profits. In the long run equilibrium, the firm produces at the minimum point of its average cost curve (P=AC) and earns zero economic profits. Therefore, option C is the correct choice.

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