Question 1
If firms in a monopolistically competitive industry are incurring losses, in the long run
◦ investment in this industry will increase to reduce production costs.
◦ firms will leave this industry until the remaining firms are earning a normal profit.
◦ firms will leave this industry until the firms that remain are earning a positive economic profit.
◦ the government will subsidize the losses incurred by these firms so as to maintain competition in the industry.
Question 2
As new firms enter a monopolistically competitive industry, the demand curve facing each existing firm will
◦ shift to the left and become more elastic because there are now more substitutes for its product.
◦ shift to the left and become less elastic because there are now more substitutes for its product.
◦ not be affected because the new firms do not produce a perfect substitute for its product.
◦ shift to the left, but the elasticity of demand will not be affected.
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