Consider the monopolistic competition model from lecture that is initially in long run equilibrium. If there is an increase in market demand for the good (X increases, meaning the price-intercept of the demand curve moves up), then:
a) Compared to the initial equilibrium, in the long run, what happens to the number of firms?
b) Compared to the initial equilibrium, in the long run, what happens to the price level of the good?
c) Compared to the initial equilibrium, in the long run, what happens to firm’s profits?
d) Describe the short run transition that this market will experience. It may be helpful to draw a graph as we did in lecture.
e) In the long run equilibrium, will firms be producing more, less, or the same quantity as before the change?
