Question
EXERCISE 3: The following diagram represents a monopoly equilibrium. a.Suppose another variety enters and the demand for a given variety declines and becomes more elastic
EXERCISE 3: The following diagram represents a monopoly equilibrium.
a.Suppose another variety enters and the demand for a given variety declines and becomes more elastic (slides inward and becomes flatter). Depict the new demand curve in the graph. In the graph, for a new demand curve determine the new equilibrium price and quantity.
b. Identify the areas corresponding to the old and new profit.
c. Draw a conclusion about the effect of entry of new firms on the equilibrium profit of each individual firm.
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d. As firms will continue to enter, what is going to happen to the demand curve and to profit? At what point will the entry of new firms stop?
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