Which of the following describes the long run situation for...

Which of the following describes the long-run situation for a firm in a monopolistically competitive market? Question 13 options: a) New firms enter the market because of monopoly profits, the firm's demand curve shifts to the left and becomes flatter, and monopoly profits disappear. b) New firms enter the market and eventually there is only one kind of product, and each firm agrees to share the profits. c) Consumers are left with no choices and no close substitutes, and firms make higher profits. d) Competition drives out firms until there is only one left.

Transcript

00:01 Okay, so we're basically going to be looking at the features of monopolistic competition.

00:05 The reason is that we want to find out what happens in the short run when there is going to be losses, when there's going to be profits.

00:15 Okay, so one of the key features of monopolistic competition is that these many suppliers or many firms, many buyers and sellers in this particular market and that the products are actually, slightly differentiated products and this allows for the fact that there's going to be many suppliers of those it's a product that is slightly differentiated so that each firm has some monopoly over the brand of the product for instance slightly differentiated it may be soap for instance, but because of the different texture of the soap, scent of the soap and size, and all these elements that make a different product will go into a business having some monopoly over the rights of that particular brand or particular product.

01:25 Okay, so which means these very close substitution.

01:33 Close substitution of the products such that you see the change if one one firm cannot really entirely go beyond the the certain level in terms of prices because of the close substitutability of the products okay so we might not need to look into that of course where the these imperfect information as well for the simple reason.

02:09 The business might own the brand, and therefore, because of that, they may not likely share that information, which distinguishes that particular product from the rest.

02:25 Okay, so with this in mind, now we look into what actually happens.

02:30 We're given four scenarios that we need to look at.

02:34 So the first scenario, if there are short -run losses in this particular firm, in this particular industry rather, firms will exit the industry and the demand for the remaining firms will increase.

02:49 Okay, so that holds true for the simple reason, monopolistic competition actually holds a downward slopping demand curve.

02:58 So you actually have a downward slopping demand curve for monopolistic competition.

03:03 And obviously if there's going to be losses incurred in this particular firm, for instance, if you find a firm operating at this level, this being the ar, this being the mr, we have the quantity, the origin, the revenues and the costs, we have the average total cost curve.

03:26 Then obviously a firm operating at this profit maximization point, you will notice that this becomes a loss for the business.

03:39 The shaded area here is the loss for the business.

03:42 So obviously once a firm encourage these losses, what it means is going to exit the market.

03:49 Why? because the chances of coming back there is going to be a bit tough because apparently there's free exit and entry into the market...

Question

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