Suppose that A Cleaner World invents a new type of laundry detergent that has an ingredient that stops stains from setting into clothes. If the laundry detergent market is monopolistically competitive, explain what will happen to the price of its product in the short run. What will happen in the long run

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Tod ThielLv2

6 Apr 2018

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Carefully explain what will happen as we move from the short run to a long run equilibrium in a monopolistically competitive industry if firms are making a positive profit in the short run. What will happen to the demand curve facing an individual firm?

amethystprairie-dog277

The market for laundry detergent is monopolistically competitive. Each firm owns one brand, and each brand has effectively differentiated itself so that it has some market power (faces a downward sloping de- mand curve.) Still, no brand earns economic profits because entry causes the demand for each brand to shift in until the seller can just break even. All firms have identical, U-shaped cost functions. Suppose that the government does a study on detergents and finds out they are all alike. The public is notified of these findings and suddenly drops allegiance to any brand.

What happens to price? What happens to total sales? What happens to the number of firms?