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Question
Macroeconomics
Posted 10 months ago
Which of the following best describes what happens when firms enter an industry with monopolistic competition?
Choose 1 answer:
(A) The marginal cost curve increases.
(B) The average total cost curve decreases.
(C) The supply curve increases.
(D) The demand curve for existing firms decreases and gets more elastic.
(E) The demand curve for existing firms increases and becomes perfectly elastic.
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Answer from Sia
Posted 10 months ago
Solution
a
Monopolistic Competition and Market Entry: In a monopolistically competitive market, firms have some degree of market power due to product differentiation. When new firms enter the industry, they increase the number of products available to consumers
b
Demand Curve for Existing Firms: The entry of new firms leads to a decrease in the demand faced by existing firms because consumers now have more options to choose from. This causes the demand curve for existing firms to shift to the left
c
Elasticity of Demand: As the number of substitutes increases with the entry of new firms, the demand for an existing firm's product becomes more elastic because consumers can more easily switch to other products
Answer
(D) The demand curve for existing firms decreases and gets more elastic.
Key Concept
Market Entry in Monopolistic Competition
Explanation
When new firms enter a monopolistically competitive market, the demand curve for existing firms decreases and becomes more elastic due to increased competition and availability of substitutes.
◊From the perspective of Macro Economics, one related question could be:
How does the entry of new firms in an industry with monopolistic competition affect overall market structure and competition levels?⍭ Generate me a similar question◊Not the question you are looking for? Ask here!
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