Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated in Figure 6-7, 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 6-7 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.