Assume that new hair salons enter the market and that the market becomes monopolistically competitive. Answer each of the following. The entry of new hair salons creates close substitutes for each individual salon’s services. As a result, will the demand for Raphael’s hair salon become more elastic or become less elastic, or will there be no change in the elasticity? Will the entry cause the demand curse for Raphael's haircuts to shift to the left, shift to the right, or stay the same? In long-run equilibrium, will Raphael’s hair salon produce the productively efficient quantity? Explain.

Raphael’s hair salon is a monopoly in a small town and is currently earning an economic profit.

1. Draw a correctly labeled graph for Raphael and include the curves that are necessary to identify the following.

   1. The profit-maximizing price and quantity of haircuts, labeled P_m and Q_m

   2. The area representing economic profits, shaded completely

2. Does Raphael’s hair salon produce the allocatively efficient quantity? Explain.

3. Assume that Raphael signs a new lease with an increase in rent, a fixed cost. Will the price of haircuts provided by Raphael increase, decrease, or stay the same in the short run? Explain.

4. Assume that new hair salons enter the market and that the market becomes monopolistically competitive. Answer each of the following.

   1. The entry of new hair salons creates close substitutes for each individual salon’s services. As a result, will the demand for Raphael’s hair salon become more elastic or become less elastic, or will there be no change in the elasticity?

   2. Will the entry cause the demand curse for Raphael's haircuts to shift to the left, shift to the right, or stay the same?

   3. In long-run equilibrium, will Raphael’s hair salon produce the productively efficient quantity? Explain.