Question

Suppose Abercrombie & Fitch sells clothing in a monopolistically competitive market and that a farmer sells oranges in a perfectly competitive market.
1.) Draw the type of demand curve likely faced by Abercrombie & Fitch. Label this line DAF.
2.) Draw the type of demand curve faced by an individual orange farmer. Label this line DOranges. Carefully follow the instructions above, and only draw the required objects.

Answer 1

Answer:

Please check the attached images for the required demand curves

Explanation:

A perfect competition is characterized by many buyers and sellers of homogenous goods and services. Market prices are set by the forces of demand and supply. There are no barriers to entry or exit of firms into the industry.  

In the long run, firms earn zero economic profit.  If in the short run firms are earning economic profit, in the long run firms would enter into the industry. This would drive economic profit to zero.  

Also, if in the short run, firms are earning economic loss, in the long run, firms would exit the industry until economic profit falls to zero.  

A monopolistic competition is when there are many firms selling differentiated products in an industry. A monopoly has characteristics of both a monopoly and a perfect competition. the demand curve is downward sloping. it sets the price for its goods and services.

An example of monopolistic competition are restaurants  

When firms are earning positive economic profit, in the long run, firms enter into the industry. This drives economic profit to zero

If firms are earning negative economic profit, in the long run, firms leave the industry.  This drives economic profit to zero

in the long run, only normal profit is earned