One firm previously operated as a monopoly.Now,one potential entrant exists.Consumers would prefer
A) entry, and the firms to split the output equally.
B) no entry, and for the incumbent to produce the Stackelberg leader level of output.
C) entry, and for the incumbent to produce the Stackelberg leader level of output.
D) no entry, and the monopoly to continue.

Question

Quizplus · Accepted Answer

Given that a potential entrant exists, the market structure has changed from a monopoly to a duopoly. In this scenario, consumers would prefer to have entry and for the incumbent to produce the Stackelberg leader level of output. This is because with entry, there is greater competition, which leads to lower prices and increased output. Additionally, with the incumbent producing the Stackelberg leader level of output, it ensures that the overall market output is at an optimal level, maximizing social welfare. Therefore, choice C is the best option.

One Firm Previously Operated as a Monopoly