Explain how price and output are determined in both the short run and long run in a monopolistically competitive market (15 marks)

Firstly define some features of monopolistically competitive market including: differentiated products, some influence over price, good information, no barriers to entry or exit, manyproducers and consumersDraw short run graph and explaining how firms set quantity by profit maximising (MC=MR), and theprice they charge can be worked out from the demand curve and the cost by the AC curve. This leads to a degree of abnormal profit assuming which is the rectangle between price and cost.Draw the long run graph implying that in the long run firms have an opportunity to enter the market, given absence of barriers to entry and they are enticed in by the abnormal profits. This results in the existing firm’s demand curve shifting left. The firms still profit maximise, but this is now at a lower level of output, where abnormal profit is likely to belower/eliminated.

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