Scenario 16-2
McDonald's restaurants has recently announced intentions to open a new restaurant in Smalltown, Indiana. Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition.
-Refer to Scenario 16-2.As a result of the new McDonald's,residents of Smalltown are likely to benefit from

Question

Quizplus · Accepted Answer

The entry of a new competitor like McDonald's in a monopolistically competitive market creates a product-variety externality. This means that consumers in Smalltown will have more choices and variety in fast-food options, which benefits them. Business-stealing externality suggests that the entry of McDonald's may take away customers from existing fast-food restaurants, which may not benefit those businesses. While McDonald's will increase its production, it is not necessary that it will reach the efficient scale immediately, so option C is not the best choice.

Scenario 16-2 McDonald's Restaurants Has Recently Announced Intentions to Open a New