Asked by Juana Jacal on Jun 23, 2024
Verified
In a small college town, four microbreweries have opened in the last two years. Demonstrate the effect of new market entrants on demand for existing firms (microbreweries) that already served this market. Assume that the local community now places a moratorium on new liquor licenses for microbreweries. How will this moratorium affect the long-run profitability of incumbent firms?
Liquor Licenses
Permits issued by government agencies that allow individuals or entities to sell alcoholic beverages legally.
New Market Entrants
Businesses or individuals that enter a market for the first time, introducing competition and innovation.
Long-Run Profitability
The ability of a firm to generate a consistent profit over an extended period of time.
- Assess the impact of new market entrants on demand and long-run profitability for existing firms.
Verified Answer
The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by all incumbent firms. If firms are able to make economic profits, these will be able to be maintained in the long run if new entrants are not allowed (which would essentially be a barrier to entry, meaning the market would no longer be characterized as monopolistically competitive).
Learning Objectives
- Assess the impact of new market entrants on demand and long-run profitability for existing firms.
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