Question

In the long​ run, what happens to the demand curve facing a monopolistically competitive firm that is earning short run​ profits? A. The demand curve will shift to the left and became less elastic throughout the relevant range of prices. B. The demand curve will shift to the right and became more elastic throughout the relevant range of prices. C. The demand curve will shift to the left and became more elastic throughout the relevant range of prices. D. The demand curve will shift to the right and became less elastic throughout the relevant range of prices.

Answer 1

The correct answer is option C.

Step-by-step explanation:

Suppose a monopolistic firm is earning profits in the short run. This will attract new firms to enter the market. In the long run, new firms will enter the market. The market supply, as a result, will increase.

The individual demand for a single firm will decrease as the existing market share will now be distributed among the increased number of firms. So the market share of each firm will decline.

This decrease in demand will cause the demand curve to shift to the left. The leftward shift in the demand curve will make it more elastic than earlier.