Scenario 16-6
Ike's Ice Cream has decided to open a new ice cream parlor in Mayville, MS. The market for ice cream parlors is monopolistically competitive.
-Refer to Scenario 16-6. As a result of the new Ike's Ice Cream parlor, existing ice cream shops located in Mayville are likely to experience a
A)business-stealing externality, which harms producers.
B)business-stealing externality, which benefits producers.
C)product-variety externality, which harms consumers.
D)product-variety externality, which benefits consumers.

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, businesses have some degree of market power and can differentiate their products. With the entry of a new competitor (Ike's Ice Cream), existing businesses are likely to lose some of their customer base or have their sales reduced, resulting in a business-stealing externality that harms producers.

Scenario 16-6 Ike's Ice Cream Has Decided to Open a New Ice