Question: Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated in Figure, consider what happens when industry demand D increases. For instance, suppose that this is the market for cars, and lower gasoline prices generate higher demand D.
a. Redraw Figure for the Home market and show the shift in the D/NT curve and the new short-run equilibrium.
b. From the new short-run equilibrium, is there exit or entry of firms, and why?
c. Describe where the new long-run equilibrium occurs, and explain what has happened to the number of firms and the prices they charge.
