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.

Answer: (A)

Verified step by step guidance

1. 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.
2. 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.
3. Step 3: Analyze how an increase in supply, with demand held constant, leads to a decrease in the market price for coffee.
4. Step 4: Consider that a lower market price reduces the revenue per unit for existing coffeehouses, which tends to decrease their profits.
5. 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.