Monopolistic Competition and Demand Shifts
How does an increase in consumer preference for a monopolistically competitive firm’s product affect its profit-maximizing level of output?
A
Production stops until it can determine whether these preferences are permanent or temporary before changing its strategy.
B
It maintains current production levels because monopolistic competitors do not respond to changes in consumer preferences due to product differentiation.
C
It will reduce its output since increased consumer preference leads to greater market saturation and lowers individual firms’ demand curves.
D
It will increase its output as the demand curve shifts rightward and the new profit-maximizing quantity is at a higher intersection of MR and MC.
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