Question

Which of the following will happen if some firms in a monopolistically competitive market incur losses in the short run and the market conditions are not expected to change?

A. Some firms will exit the industry in the long run.
B. New firms will enter the industry in the long run.
C. The demand for the goods produced by the firms will decrease.
D. The existing firms will continue production in the long run.

Answer 1

When firms in a monopolistically competitive market incur ongoing losses, some will exit the industry, reducing supply and allowing prices to potentially rise, moving towards a new long-run equilibrium with zero economic losses.

Step-by-step explanation:

If some firms in a monopolistically competitive market incur losses in the short run and the market conditions are not expected to change, the likely outcome is that some firms will exit the industry in the long run. This occurs because firms in a monopolistically competitive market experiencing economic losses will find it unsustainable to continue incurring losses indefinitely. The exit of firms will lead to a reduction in market supply, which can help prices to rise, possibly allowing the remaining firms to break even or become profitable. This process continues until losses are driven up to zero in the long run, and a new long-run equilibrium is established where firms earn normal profits, and no firm has an incentive to enter or exit the market.