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

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

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of a competitive market, where many firms sell similar products and entry and exit are relatively easy.
2. Step 2: Recognize that when new coffeehouses enter the market, the total supply of coffeehouses increases, which typically leads to increased competition among sellers.
3. Step 3: Analyze how increased competition affects the market price and profits. Generally, more competition drives prices down or keeps them from rising, reducing the profit margins of existing firms.
4. Step 4: Consider that while higher market demand could increase profits, the problem states entry of new firms, which usually means supply increases more than demand, leading to lower prices and profits.
5. Step 5: Conclude that the entry of new coffeehouses typically decreases the profits of existing coffeehouses due to increased competition, as firms compete for the same customers.