In a perfectly competitive market, what typically happens when a new firm enters an industry?

• A. Market demand increases, causing the equilibrium price to rise.
• B. Market supply decreases, causing the equilibrium price to rise.
• C. Market demand decreases, causing the equilibrium price to fall.
• D. Market supply increases, causing the equilibrium price to fall.

Answer: (D)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive market, where many firms sell identical products and no single firm can influence the market price.
2. Recognize that when a new firm enters the industry, it adds to the total quantity of goods supplied in the market, thus increasing the overall market supply.
3. Recall the law of supply and demand: an increase in market supply, with demand held constant, typically leads to a decrease in the equilibrium price.
4. Analyze the effect on equilibrium: as supply shifts rightward, the new intersection point with the demand curve results in a lower equilibrium price and a higher equilibrium quantity.
5. Conclude that the entry of a new firm increases market supply, which causes the equilibrium price to fall, consistent with the principles of perfect competition.