Question

Suppose firms in a monopolistically competitive industry currently charge a price less than their average total cost.

What will be the profitability for firms in the short and long term?

1) In the short run, firms in this market will

A) make a loss.

B) break even.

C) make a profit.

2) In the long run, firms in the market will

A) break even or exit the market.

B) make a loss.

C) make a profit.

3) What will happen to the number of firms in the industry in the long run?

A) More firms will enter the market.

B) The same number of firms will be in the market.

C) Some firms will exit the market.

# What would you expect to happen to the curves in the long run?

4) The marginal revenue curve will likely

A) shift to the left.

B) remain unchanged.

C) shift to the right.

5) The perceived demand curve will likely

A) remain unchanged.

B) shift to the right.

C) shift to the left.

Answer 1

For a monopolistically competitive market the firm will not make any profit in the long run and they can make a profit or loss in the short run, there is free entry and exit in the market so in the long run they will only break even.

a) As the price is less than ATC they will be making a loss in the short run.

b) In the long run, they will break even or exit the market.

c) in the long run, there will be less number of firms in the market as due to loss some firms will leave the market.

d) The marginal curve will shift to the right as the output in the long run and the price will increase.

e) The demand curve will shift to the right.