Answer to Question #184994 in Microeconomics for James

Question

QUESTION 11

A monopolistic competitor who earns a profit must expect:

1. Those profits to continue without change.
2. Firms to exit the market.
3. Firms with similar, but differentiated, products to enter the market.
4. Firms with identical products to enter the market.
5. Firms with complementary products to leave the market.  

QUESTION 12

The demand curve that a monopolistically competitive firm faces:

1. Will shift left due to the entry of other firms into the same general market.
2. Will shift right due to the entry of other firms into the same general market.
3. Will shift right due to the exit of other firms into the same general market.
4. Will not be affected by the entry of other firms into the same general market.
5. Will not be affected by the exit of other firms into the same general market. 

Answer 1

11 Firms with similar, but differentiated, products to enter the market.

Explanation.

If one monopolistic competitor makes a profit, more businesses would be enticed to enter the industry. A monopolist is surrounded by obstacles to entry and does not need to be concerned with entry, but a profit-making monopolistic rival must anticipate the entry of companies offering identical but distinct goods.

12 Will shift left due to the entry of other firms into the same general market.

Explanation.

When new firms enter the market, the supply of distinct goods increases, causing the firm's market demand curve to shift to the left. The firm's demand curve will begin to shift to the left as more people enter the industry until it is only tangent to the overall total cost curve at the profit-maximizing level of output. There is no longer any opportunity for new firms to enter the industry when the firm's economic profits are negligible. As a result, in the long run, the rivalry created by new firms would allow each firm in a monopolistically competitive market to reap normal profits, much like a perfectly competitive firm.