Question

When new firms enter a monopolistically competitive​ market, the economic profits of existing firms A. will decrease because their demand curves will shift to the left. B. will decrease because their demand curves will become more inelastic. C. will decrease because their demand curves will shift to the right. D. will remain unchanged because they sell differentiated products. E. will increase because their average cost of production will decrease.

Answer 1

Answer:

The correct answer is option A.

Explanation:

Monopolistic competition is a market structure where there is a large number of producers selling differentiated products. These firms are price makers. There is very low or no restriction on the entry and exit of new firms.  

Positive economic profits earned by the existing firms will attract potential firms to enter the market. When new firms enter, it increases the supply in the market.  

This causes the price and market share of existing firms to decline. As the individual demand curves of the existing firms shift to the left, their profits will increase as well.