Question 2 Not yet answered (10 points=4 points for diagram+6 points for explanation) Suppose a monopolistically competitive firm's demand curve is given by P = 120 - 0

The above case of monopolistic competition clearly shows that the firm in monopolistic competition is earning super normal profits in the short run. This is because price of the firm is greater than the average cost of the firm. This leads to excess profits for the firm. Earning of profits in the short run by the monopolistic firm will attract new firms in the industry. As new firms will enter the industry, this will increase the demand for factors of production and thus increase the prices of factors of production in the economy. As prices of factors increases, the cost curves of the firm will shift upwards. The demand curve will also shift downwards as the market gets divided into many firms selling products that are close substitutes of each other. The equilibrium of the monopolistic firm in the long run can be depicted as;

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