In the context of microeconomics, how does the entry of new coffeehouses typically affect the profits of existing coffeehouses in a competitive market?

• A. Profits of existing coffeehouses remain unchanged as entry does not affect competition.
• B. Profits of existing coffeehouses usually decrease due to increased competition.
• C. Profits of existing coffeehouses usually increase because of higher market demand.
• D. Profits of existing coffeehouses are guaranteed to rise due to economies of scale.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the market structure described. The problem refers to a competitive market where new firms (coffeehouses) can enter freely. In such markets, entry and exit of firms are key features.
2. Step 2: Recall the concept of economic profits in a competitive market. When firms earn positive economic profits, it attracts new entrants because there are no significant barriers to entry.
3. Step 3: Analyze the effect of new entrants on the market supply. The entry of new coffeehouses increases the total supply of coffeehouses in the market, which tends to lower the market price of coffee.
4. Step 4: Consider how the lower market price affects existing firms' profits. Since the price decreases, the revenue per unit sold by existing coffeehouses falls, which reduces their profits.
5. Step 5: Conclude that in a competitive market, the entry of new coffeehouses typically leads to decreased profits for existing coffeehouses due to increased competition and lower prices.