Question

When a new firm enters a market, it: A. Pushes the equilibrium price upward. B. Reduces the profits of existing firms. C. Shifts the market supply curve to the left. D. Shifts the market demand curve to the left.

Answer 1

When a new firm enters a market, it reduces the profit of existing firms. So, B is the correct answer.

Step-by-step explanation:

Whenever a new firm enters in an existing market, it increases competition in the market, thereby taking away some portion of sales from the firms that already exist in the market. Moreover, the new entrant also increase the supply of the product in the market, thereby shifting the supply curve to the right and ceteris peribus, the equilibrium price falls. A fall in the market equilibrium price and sales causes the profits of the existing firms to fall.