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Question
Consider an incumbent firm in a monopolistically competitive market.
(a) Describe the two key attributes of a monopolistically competitive market in the short run.
(b) Describe one further attribute of a monopolistically competitive market that holds in the long run.
(c) With reference to a diagram, compare and contrast an incumbent firm's situation in short run with its situation in the long run. (Hint: describe how and why an incumbent firm's demand curve evolves over time.)
(d) Assuming that the average cost curve is U-shaped, discuss the question of long-run efficiency in a monopolistically competitive market.
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