Consider a Monopolistically Competitive Industry in Long-Run Equilibrium

Consider a monopolistically competitive industry in long-run equilibrium. Suppose there is a large increase in wages that raises the costs for all firms. What happens within each firm in the short run?

A) They will be forced to close down due to the excess costs.
B) They will continue producing as before, cushioned by their previous excess profits.
C) They will expand output and try to make up for lost profits.
D) They will lower prices and try to steal customers away from their rivals.
E) They will decrease production and produce the quantity at which marginal revenue equals the new (higher) marginal cost curve; this means a rise in price.

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