If a new firm enters an industry that was previously a monopoly, the original firm will find that less is demanded at every price. In addition it will find that it faces a more elastic demand curve (since there are now more substitutes). Only D₄ satisfies both of these requirements.

  

8. Consider the demand curves shown in Figure 2. If D is the demand curve for a monopolist, which demand curve represents the one that it will face if a second firm enters the industry.

1. D₁ On this demand curve more is demanded at higher prices than on the original curve. This would make no sense as a result of entry.
2. D₂ On this demand curve more is demanded at lower prices than on the original curve. This also would make no sense as a result of entry.
3. D₃ On this demand curve more is demanded at every price than on the original curve. This would make no sense as a result of entry.
4. D₄
5. D₅ On this demand curve less is demanded at all but the highest prices so at first it would seem reasonable, but it is more inelastic and at very high prices the same amount is demanded as on the original curve so it isn't correct.

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