Delish, a moderately priced restaurant, has recently announced intentions to ope

Question

Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic competition.

Refer to Scenario 16-4. As a result of the new restaurant, existing restauranteurs in Boston are likely to experience a

Question options:

1 business-stealing externality, which is a positive externality.

2 product-variety externality, which is a positive externality.

3 product-variety externality, which is a negative externality.

4 business-stealing externality, which is a negative externality.

Explanation / Answer

Option 4-> The business-stealing externality: entry of a new firm imposes a negative externality on existing firms-Because other firms lose customers and profits from the entry of a new competitor,

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