When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality then ?
Correct answer: A. there are too many firms in the market and market efficiency could be increased if firms exited the market
- A. there are too many firms in the market and market efficiency could be increased if firms exited the market
- B. the number of firms in the market is optimal and the market is efficient
- C. There are too few firms in the market and market efficiency could be be increased with additional entry
- D. The only way to improve efficiency in this market is for the government to regulate it like a natural monopoly.
Explanation
The business-stealing externality makes entry impose a cost on existing firms, while product variety benefits consumers. If the former is larger, entry has gone beyond the efficient level and some firms should exit.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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