Question

7. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will

	a.	shift to the left.
	b.	shift to the right.
	c.	shift in a direction that is unpredictable without further information.
	d.	remain unchanged. It is the supply curve that will shift.

why not D??

Answer 1

Answer : The answer is option a.

In monopolistically competitive market all firms sell differentiated products. In case of differentiated products if new firms enter into the market then the individual get more options to choose the product. In this situation the individual will buy those products from which the individual become better off. As a result, in the market the existing fims' individual demand curve shift to leftward.

Given option d states that the individual demand curve will remain same and only the supply curve will shift. But from above discussion it is clear that when new firm enter into the monopolistically competitive market then the individual demand curve shift to leftward. Because monopolistically competitive firms sell differentiated products and if new firms enter into the market then the individual gets more option to choose the products. As a result, in the market the existing firms' individual demand curve shift to leftward. Hence option d is not the answer.