Question

1. Briefly, under what circumstances may free entry result in an excessive number of firm from a social welfare standpoint? Why?

Answer 1

The circumstance or assumption is that for any number of entrants, if the resulting equilibrium price is not below the marginal cost of any product in that market. If the given condition holds strictly, then the equilbrium number of firms strictly exceeds the socially optimal number of firms. This is also in line with the assumption that, if it holds true(not necessarily strictly) then, the number of firms is not less than the socially optimal standpoint.