Suppose you manage a local grocery store and you learn that a very popular national grocery chain is about to open a store in your town a few miles away.

Use the model of monopolistic competition to analyze the impact of this new store on the quantity of output your store should produce (Q) and the price your store should charge (P). Note, we are assuming you each sell one representative good.

Explain how the opening of this new store may affect your business. Be sure to address what can happen to your customers, supply and demand, and prices. What will happen to your profits? Show graphically and explain your reasoning in detail. (e.g., how and why will your profits change? How can that be seen on the graph?)

Explain at least one strategy that could be used to defend your market share against the new store (e.g., address what you are going to do to keep your customers).