Scenario 16-5
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 16-5. As a result of the new McDonald's, residents of Smalltown are likely to benefit from

Question

Quizplus · Accepted Answer

With the entrance of a new player in the market, consumers are likely to benefit from a product-variety externality, meaning that they will have more options to choose from, which typically leads to improved quality, better prices, and more variety of products. Business-stealing externality occurs when one firm's presence hurts the business of its rivals. However, it is less likely to happen in a monopolistic competition market since there are already many players. The efficient scale of production refers to the lowest point on the average cost curve at which the firm can produce goods and services most efficiently. While McDonald's may increase its production, there is no guarantee it will achieve the scale of production needed to be efficient.

Scenario 16-5 McDonald's Restaurants Has Recently Announced Intentions to Open a New