EXERCISE 3: The following diagram represents a monopoly equilibrium.

a.Suppose another variety enters and the demand for a given variety declines and becomes more elastic (slides inward and becomes flatter). Depict the new demand curve in the graph. In the graph, for a new demand curve determine the new equilibrium price and quantity.

b. Identify the areas corresponding to the old and new profit.

c. Draw a conclusion about the effect of entry of new firms on the equilibrium profit of each individual firm.

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d. As firms will continue to enter, what is going to happen to the demand curve and to profit? At what point will the entry of new firms stop?

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