The diagram below shows the marginal cost (MC), average cost (AC), and demand curve faced by a representative firm in a monopolistically competitive market. Which one of the following statements is TRUE?

Question

BlackTom AI · Accepted Answer

To analyze the diagram, I will consider how entry and competition in a monopolistically competitive market affect the demand faced by an individual firm over the long run.
Option 1: 'In the long run, the demand curve shifts in (or left).' In a monopolistically competitive market, new firms can enter when existing firms earn profits, which increases the number of close substitutes. This expanded set of substitutes makes each individual firm's demand curve more elastic and effectively shifts it to the left over time. The diagram shows the firm's demand facing a downward-sloping DAS (DSR) curve; as the industry grows with more firms, the particular firm's demand shifts left, reducing its price and quantity at the profit-maximizing point. This aligns with the standard result that long-run entry reduces the perceived demand for any given firm. 
Option 2: 'In the long run, the demand curve shifts out (or right).' A rightward shift would imply fewer substitutes or some protection that makes individual demand stronger, which is inconsistent with the competitive entry mechanism in monopolistic competition. As new firms enter, each firm loses some market power and faces a relatively weaker demand, not a stronger one.
Option 3: 'There will be fewer firms in the long run.' This statement contradicts the basic dynamic of monopolistic competition, where free entry leads to more firms, not fewer, when profits would otherwise be positive. The long-run tendency is toward zero economic profit with more competition, not reduced competition.
Option 4: 'The market is in long run equilibrium.' While the market may reach a long-run equilibrium in terms of profits being zero, the specific claim that the diagram’s true statement is about the demand curve shifting left is more precise. The diagram emphasizes the adjustment of the individual firm's demand due to entry, which points to the leftward shift rather than a blanket equilibrium assertion.

The diagram below shows the marginal cost (MC), average cost (AC), and demand curve faced by a representative firm in a monopolistically competitive market. Which one of the following statements is TRUE?单项选择题

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