You run a small but profitable accounting business with many local clients. When you opened your business, there were very few competitors in your area, but you’ve recently learned that several new businesses providing similar services will be entering the market soon.

a. Use a graph to illustrate the impact on your firm’s demand curve when rival businesses enter the market and explain the causes of the change in demand drawn on your graph. 

b. Suppose instead you learn that most existing businesses in this market are experiencing negative economic profit. How would your answer to this question change? 

c. As a result of rival businesses entering the market, your annual revenue becomes $300,000 and your annual out-of-pocket expenses become $270,000. What is your business’s accounting profits? What additional information do you need to determine economic profit?