Question

The model of monopolistic competition characterizes the market for plumbing services in a city. This market is initially in long-run equilibrium, but then there is an increase in market demand for plumbing services. We expect that in the long run: a. firms will leave the plumbing market. b. there will be a short-run increase in the number of firms, but then the number will return to the original level. c. firms will shut down, but they will not leave the industry. d. new firms will enter the plumbing market.

Answer 1

D) new firms will enter the plumbing market.

Step-by-step explanation:

In the short run the price and output of existing plumbing services will rise, increasing revenues and profits.

But in the long run, new plumbing companies will enter the market. Other companies will see that exiting plumbing companies are making a lot of money and therefore they will want a share of the market and the profits for themselves. That will eventually shift the price to a new equilibrium.