When firms enter a monopolistically competitive market:
A) product variety diminishes.
B) the demand curves of established firms shift to the right.
C) prices fall.
D) profits increase.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms differentiate their products from each other, resulting in a downward sloping demand curve that is less elastic compared to a perfectly competitive market. When new firms enter this market, the number of products available to consumers increases, leading to increased competition and pressure to lower prices. Therefore, prices tend to fall instead of increasing, making Option C the correct answer. Option A is incorrect because the entry of new firms typically increases product variety. Option B is also incorrect because the demand curve of existing firms shifts to the left as they lose market share. Option D may or may not be true, depending on whether the new firm can establish its brand and differentiate its product successfully.

When Firms Enter a Monopolistically Competitive Market