As new firms enter a monopolistic competitive industry, it can be expected that:
A) market price will increase.
B) the output of existing firms will increase.
C) profits of existing firms will increase.
D) market demand should decrease.
E) profits of existing firms will decrease.

Question

Quizplus · Accepted Answer

With the entry of new firms, the market becomes more competitive, leading to a reduction in the market share of existing firms. As a result, they lose their monopolistic power to charge high prices, which reduces their profits. Therefore, the profits of existing firms will decrease.

As New Firms Enter a Monopolistic Competitive Industry, It Can