The market for laundry detergent is monopolistically competitive. Each firm owns one brand,
and each brand has effectively differentiated itself so that it has some market power (i.e., faces a
downward sloping demand curve). Still, no brand earns economic profits, because entry causes
the demand for each brand to shift in until the seller can just break even. All firms have identical
cost functions, which are U-shaped.
(a) Is this market in long-term or short-term equilibrium? Explain your claim?
Now suppose that the government does a study on detergents and finds out they are all alike. The
public is notified of these findings as a result consumers drop allegiance to any particular brand.
As a result of this event, discuss the long-run effects on the laundry detergent market.
Specifically, answer the following questions:
(b) What will be the effect on the demand curve of firms in this market? Why?
(c) How will this event effect the market price of laundry detergent? Explain.
(d) How will each firm’s supply and sales change? Explain.
(e) Does this event increase or decrease the number of firms in this market? Why?
(f) What will happen to total quantity output in the laundry detergent market? Explain.
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