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 16-2. As a result of the new restaurant, consumers in Boston are likely to experience a a. business-stealing externality, which is a positive externality. b. product-variety externality, which is a positive externality. c. product-variety externality, which is a negative externality. d. business-stealing externality, which is a negative externality.

Answer 1

Answer:

The correct answer is letter "B": product-variety externality, which is a positive externality.

Explanation:

In economics, an externality is a cost or benefit incurred or received by a third party who has no control over the factors that created the cost or benefit. Even if they are usually associated with negative events, externalities represent opportunities or threats that arise during the business.

In the example, the introduction of a new restaurant in a monopolistic market creates product-variety. This introduction is a positive externality for consumers who will benefit from the different prices the market would offer but a negative externality to the monopolistic restaurants since their market share will be reduced.