Multiple Choice
Which of the following is a major avenue for achieving a cost advantage over rivals in competitive markets?
68
views
3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market, how does the entry of new coffeehouses typically affect the profits of existing coffeehouses?
A
Profits of existing coffeehouses decrease due to increased competition.
B
Profits of existing coffeehouses increase because of higher market demand.
C
Profits of existing coffeehouses remain unchanged as entry does not affect competition.
D
Profits of existing coffeehouses increase because new entrants set higher prices.
Verified step by step guidance1
Step 1: Understand the nature of a competitive market, where many firms sell similar products and no single firm can influence the market price significantly.
Step 2: Recognize that when new coffeehouses enter the market, the total supply of coffeehouses increases, which typically shifts the market supply curve to the right.
Step 3: Analyze how an increase in supply, with demand held constant, leads to a decrease in the market price for coffee.
Step 4: Consider that a lower market price reduces the revenue per unit for existing coffeehouses, which tends to decrease their profits.
Step 5: Conclude that increased competition from new entrants generally causes profits of existing coffeehouses to decrease, as they must compete on price and cannot maintain previous profit levels.
Related Videos
Related Practice
