Figure 10-7 shows short-run cost and demand curves for a monopolistically compet

Question

Figure 10-7 shows short-run cost and demand curves for a monopolistically competitive
fi rm in the market for designer watches.
18) Refer to Figure 10-7. If the diagram represents a typical fi rm in the designer watch
market, what is likely to happen in the long run?
a. Some fi rms will exit the market causing demand to increase for fi rms remaining in the
market.
b. Ineffi cient fi rms will exit the market and new cost effi cient fi rms will enter the market.
c. The fi rms that are making losses will be purchased by their more successful rivals.
d. Firms will have to raise their prices to cover costs of production.

Explanation / Answer

d. Firms will have to raise their prices to cover costs of production.

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