Check Your Understanding

1. Question

   Suppose a monopolistically competitive industry composed of firms with U-shaped average total cost curves is in long-run equilibrium. For each of the following changes, explain how the industry is affected in the short run and how it adjusts to a new long-run equilibrium.

   1. a technological change that increases fixed cost for every firm in the industry

   2. a technological change that decreases marginal cost for every firm in the industry

2. Question

   Why is it impossible for firms in a monopolistically competitive industry to join together to form a monopoly that is capable of maintaining positive economic profit in the long run?

3. Question

   Indicate whether the following statements are true or false, and explain your answers.

   1. Like a firm in a perfectly competitive industry, a firm in a monopolistically competitive industry is willing to sell a good at any price that equals or exceeds marginal cost.

   2. Suppose there is a monopolistically competitive industry in long-run equilibrium that possesses excess capacity. All the firms in the industry would be better off if they merged into a single firm and produced a single product, but whether consumers would be made better off by this is ambiguous.

   3. Fads and fashions are more likely to arise in industries characterized by monopolistic competition or oligopoly than in those characterized by perfect competition or monopoly.