When a new firm enters an industry, which of the following often occurs?

• A. Barriers to entry become higher for future firms.
• B. Market supply increases, leading to lower equilibrium prices.
• C. Existing firms experience higher profits due to reduced competition.
• D. Market demand decreases, causing prices to rise.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of market entry in microeconomics. When a new firm enters an industry, it typically increases the total quantity of goods or services supplied in the market.
2. Step 2: Recognize that an increase in market supply shifts the supply curve to the right. This means at every price level, more quantity is available than before.
3. Step 3: Analyze the effect of increased supply on the market equilibrium. With demand remaining constant, a rightward shift in supply leads to a lower equilibrium price and a higher equilibrium quantity.
4. Step 4: Consider the impact on existing firms. Increased competition from the new entrant usually reduces the profits of existing firms, as prices fall and market share is divided among more competitors.
5. Step 5: Conclude that barriers to entry do not necessarily increase immediately when a new firm enters, and market demand typically does not decrease simply because of a new entrant. The key effect is the increase in market supply and the resulting lower equilibrium price.