(ii) Draw a diagram depicting a firm in a monopolistically competitive market that is making profits. Now show what happens to this firm as new firms enter the industry.

(iii) Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?

(iv) What is the importance of freedom of entry and exit to the long-run outcome in a monopolistically competitive market?

(Hint: Please explain this in relation to the diagram you have drawn, giving appropriate examples if necessary.)