When new firms enter a monopolistically competitive industry:

Question

Quizplus · Accepted Answer

The entry of new firms increases the number of competitors in the industry, which reduces the market share of each established firm. As a result, the demand curve of each established firm shifts inward, reducing the quantity demanded at each price level. This also reduces the profit and incentivizes established firms to decrease production levels. Therefore, (B) is the correct answer. The other choices are incorrect because new entrants increase competition, which can make it difficult for established firms to lower their average total costs or increase their average revenue.

When New Firms Enter a Monopolistically Competitive Industry