ABC Restaurant specializes in rice noodles and has driven up their economic profit, causing competitors to enter the restaurant market. Illustrate what will happen to the demand for ABC Restaurant's products and services, assuming that it is operating in a monopolistically competitive market.

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Explanation:

Monopolistic competition is regarded to as a market structure where the products that are sold in the market are closely differentiated and also there is a free entry and exit as new firms can enter the market.

It should be noted that in the short run, the firm will make economic profits and this will increase but in the long run when more firms enter the market, this will bring about more competitors and this will bring about a rose in the supply of rice noodles.

Since there's an increase in the supply of rice noodles, the price of the product will reduce and this will eventually result in ABC Restaurant earning a normal profit just like every other form in the market.

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