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

a)

Entry of new firms will not shift the demand curve of the existing firms. The output will increase but the demand curve remains same. So, this option is incorrect

b)

Decision of some firms to leave the industry will not affect the demand curve of existing firms even if the firms are incurring economic losses.

This option is also incorrect

c)

Coffee shops will not leave the industry if there are economic profits. New firms will entered as they get lured by the profits of the existing firms.

this option is incorrect

d)

If there are economic losses, then the firms will decide to leave the industry. New firms will not be willing to enter into the market. This option is incorrect

All given options are incorrect