The correct answer is option 2: Decrease
- In a situation of free entry and exit of firms, firms can freely enter when profits exist and exit when losses occur.
- If the demand curve shifts to the left, it means that demand has decreased at every price level.
- As a result:
- Equilibrium price falls because lower demand reduces willingness to pay.
- Equilibrium quantity decreases because firms produce less due to reduced sales.
- In the long run, some firms may exit the market if they are unable to cover costs, further reducing supply.
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