Return to the scenario described in given question, the initial free-trade equilibrium for dishwashers and the increase in global demand.
In your answer use a graph like those shown in the box "The Individual Firm in Monopolistic Competition."
a. Show graphically and explain whether the typical individual firm earns an economic profit or a loss in the short run just after the general increase in global demand occurs.
b. Show graphically and explain the situation for the typical individual firm when the global market has adjusted to its new long-run equilibrium.
Question
The global market for household dishwashers is monopolistically competitive. It is initially in a free-trade equilibrium, with 40 models offered, and a price of $600 for a typical dishwasher. In your answer use a graph like that shown in given Figure.
There is now a permanent increase in global demand for dishwashers generally, so the global market size increases by about 15 percent.
Show graphically the effect on the number of dishwasher models offered, after the global market has adjusted to a new long-run equilibrium. Explain the process of adjustment to this new long-run equilibrium.
