Question

Suppose that the coffee shops in Spainare a monopolistically competitive market. Which of the following statements is correct for this market? Explain your answer logically

.a) If there are short-run economic profits, coffee shops will enter the industry and the demand curves of existing coffee shops will shift to the right.

b) If there are short-run economic losses, coffee shopswill leave the industry and the demand curves of the remaining coffee shops will shift to the left.

c) If there are short-run economic profits, coffee shops will leave the industry and the demand curves of the remaining coffee shops will shift to the right

.d) If there are short-run economiclosses, coffee shops will enterthe industry and the demand curves of the remaining coffee shops will shift to the right.

Answer 1

In a monopolistically competitive market,

if new firms see that existing firms are earning short run economic profits, new firms will enter the market till the economic profits become zero and if there are short run economic losses then existing firms will leave the industry till the losses are contained and reduced to zero.

Hence only options a and b satisfy the above conditions.

If new firms enter then there will be demand for their goods and hence they will take away from the demand from existing coffee shops, and hence the demand curve for existing coffee shops will shift to the left. Hence option a is not correct.

If from some existing firms, some exit the industry then the remaining firms will have more demand per capita and hence their demand curves will shift to the right. Hence option b is not correct.

Hence all the options are incorrect.